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  1. Wealth
May 22, 2013

The Fundamental Flaw Afflicting both Football and Finance

By Spear's

Short-term thinking is bad for performance, both on the pitch and off

I’m writing about short termism for the June edition of Spear’s. I’ll be explaining the toxic chain by which asset owners judge their investment managers on their quarterly performance and, in turn, investment managers judge corporate managers on their ability to maximise profits within that timeframe; a negative loop which lowers returns for both parties. I’ll be going into some of the colourful financial examples of this in June, but in the meantime I’ve noticed a striking parallel in an alternative sphere that makes the subject much more accessible: football. 

Read about investing in football

The Premier League season ended on Sunday and so rampant is the short-term focus of its 20 teams that only 2 have managers who have been at the club for more than a season. Arsene Wenger at Arsenal is one —but after 16 seasons he is more unpopular than ever. Alan Pardew at Newcastle is the other — but he isn’t exactly a symbol of longevity, having worked on Tyneside for a mere 2 ½ seasons.

On one level, that’s exciting as there’s everything to play for next season with Mourinho reuniting with Chelsea, Moyes joining Man Utd and Pellegrini destined for Man City. But on another, it’s farcical. Following the same negative loop as the investment and corporate worlds, the short-term expectations of football club owners mean that managers are judged on a game-by game basis and, in turn, players are weighed on their ability to deliver within that time frame.

Just as in the corporate and investment worlds, some of the projects that create the most long-term value take time, however. For example, you’d get an infinitely greater return on your investment by spending money on nurturing young players in an academy than you would from buying an experienced international at the apogee of his career.

The best example comes from Man Utd. There, the academy costs approximately £4 million per annum, which is a bargain when one takes into account the players that it has schooled, from Ryan Giggs to David Beckham.

The Man Utd. academy shows that in football, long-term planning can pay off

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And it’s even more of snip if you compare £4 million to the expensive flops that other clubs have signed as ‘instant answers’ in the meantime: Fernando Torres at £50 million, Robinho at £32 million and Andriy Shevchenko at £30 million are but a few.

Of course, the parallels between the sporting and business worlds imply that short-termism is a feature of modern culture. Short-termism, and with that the desire for rapid change, has had positive side-effects. The fact that it took 70 years for planes to be adopted by 50 million users whereas Facebook amassed 500 million users in 7 years suggests that the amount of change that humanity has experienced in the last 1,000 years will be equivalent to the amount of change experienced in the next 100. 

Then again, short-term fidgeting also has negative side effects. The FTSE 100 may be at a 13-year high but consider where it would be if investment and corporate managers focussed on projects which maximised long-term value. And if football managers did the same, then we might just be seeing an all-English Champions League Final on Saturday instead of an all-German one.

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