Why Quarterly Reporting Shouldn’t Be Abolished

One is quarterly guidance, which fuels the earnings meet/beat game. That, in turn, creates a chicken/egg strategy of playing to the market. That’s tied to the second issue: Adjusted earnings, which are meant to strip away whatever the company perceives to be the bad stuff so its numbers look better than they really are. 

Supercharging the Short Term

Both of these combined, are in the name of nothing more than supercharging short-term results. Without changes to both of those, regardless of the interval between results, nothing will be different except things are likely to get more volatile... especially in a market where fake and real information flows by milliseconds, and is then sliced, diced and chipped by computer algorithms. 

The model that Berkshire Hathaway $BRK has created perhaps works best: No guidance. No adjustments. Heck - not even earnings calls. Just the facts, with an extended annual meeting. Make investors do their own work, rather than trying to read tea leaves. That’s unrealistic, of course... because what works for Berkshire isn’t likely to work for most, certainly not today.

All of this really boils down to what venture capitalist Fred Wilson of Union Square Ventures wrote on his blog in 2018, the last time the President chatted this up (emphasis by me)...

The long-term vs short-term thing is the critique I hear most often. But I don’t buy it. The best run public companies manage to think and act with a long-term focus while being public. I think it comes down to leadership, courage, and foresight more than whether you are public or not.

Stock price volatility is a factor no matter if you are public or not. At least when you are public, everyone knows when your valuation is going down. Private companies are able to hide that from their employees, the media, and others. Which is just kicking the can down the road and that always ends badly. I prefer the transparency of being public on this one.

Let's not forget: The reason companies go public, unless spun out of private equity as “an exit,” is to raise cash. That cash is then supposed to be used to help the company grow and execute on its strategy. it's the very essence of capitalism. If done right, that strategy is likely to change and evolve, as management sees what works... and what doesn’t.

Run the Business, Not the Stock

Dealing with the short-termism of the markets is bane of any public company executive, especially of a young company. Howard Schultz writes about this in his “Pouring Your Heart Into It” book about starting Starbucks $SBUX. When he stopped paying attention to the company’s stock, he wrote, everything else started to fall into place.

And that’s the point... if the business is run well, ultimately the stock should follow – algos, pod shops and overall changes in market structure, notwithstanding.

All of which is a long-winded way of saying: The answer is not less transparency, because with less-frequent reporting, that's just what will happen. Rant over.