In some ways this whole thing of Wall Street and earnings calls is like a self-made gambling parlor. I was watching CNBC this past Thursday morning and they did a lead-in about the upcoming earnings story about Wal-Mart. Wal-Mart had a “beat” this morning meaning it’s earnings per share were better than the analysts had estimated, but “the street” is unhappy with soft guidance and weak same store sales. Now if you listen to Wall Street analysts, that all actually means something. And if you have money on Wall Street it I suppose it does. Analysts will lower expectations for the company, investment managers will sell the stock and therefore when there are more sellers than buyers the price will go down, temporarily. But if you just a regular investor, someone who’s not doing this for a living but just trying to invest in good companies in hopes of building some wealth what should you be looking for when you invest in a company? And what should the price of the stock tell you? Seemingly you’re buying stock in a company because you believe that company will be successful in the future, they will continue to grow and be profitable and if they do, then the future cash flow of the company will make it more valuable and therefore at some point you, or your children, or your estate can sell the stock for more than you bought it for. This will increase your own cash flow and allow you to do other things that you’d like to do with that money…like build a house or go on vacation. All that makes sense right? So the question them becomes, how do you determine if Wal-Mart will continue to grow, continue to be successful, profitable and generate cash flows in the future that will justify you asking for a higher price for the stock than that at which you bought it? Now I’ve had the benefit of running a few businesses so maybe I have more information than most people on Wall Street, but if I were still a CEO, I can tell you for certain that the fact that my quarterly earnings per share were higher than, lower than or equal to an average set by a group of guys who aren’t inside my business gives you as an investor absolutely zero understanding of the future prospects of my company. In business, things change everyday and the relationships that most large businesses have to navigate and manage are so complex (and the outcomes of those relationships can takes years to manifest themselves) that quarterly earnings tell you at most about (I’ll be generous) 20% of the story. Now add to that “soft guidance” for next quarter (which is again an earnings number) and same store sales, which I admit is a valuable metric in the retail arena. But again, what are you trying to understand? The Future potential of the company to generate excess cash flow (that which is in excess of what could be expected just from keeping up with the general economy). So is the guidance valuable? Well maybe…if you, your kids or your estate need to sell the stock within the next quarter then this is a very valuable thing to know. If however, you’re “investing” for some future longer than 3 months…next quarter’s guidance is a pretty useless number. If Warren Buffet’s ownership threshold is FOREVER…what the hell does he care about next quarter’s guidance? And what about same store sales? Well obviously if you own an asset and you can understand if that asset will be increasing or decreasing in value over the period when you own it, that would be a good thing. So the obsession with same store sales would lead you to believe if a company has one quarter when sales this period were lower than last, you should assume that this will continue on into the future without fail…does that make sense to anyone? The problem with Wall Street is that most of the people who work here first have never actually run a business and second have generally become very lazy. I’d submit that, again, unless you are a “trader” and don’t intend to hold the stock for more than a few hours or days and certainly not more than a few months, then there are a lot of other things you need to know if you want to understand whether or not the companies you own will be successful in the future…like how do employees feel about working there? Are they productive? Are they willing to give discretionary effort for the company? Do they know their jobs well enough so that when they do give that effort it is effective? Are customers loyal such that they will keep coming back year-after-year and be willing to pay a premium for the company’s products? What risks does the company face in the future? What is the corporate culture like? Is it one that focuses on caring and quality and innovation such that it will foster new products, make sure those products are always safe for consumers…because they really care? Will it stop them from treating customers in a ham-handed fashion when things do go wrong and keep them away from any financial shenanigans? How do the communities where the company operates feel about the company? Is it a welcomed neighbor or will it have to fight lengthy and expensive legal and civil battles simply to find places to do business? How do they recruit and hire new talent? By the way, if you run a business, these are the issues that really concern you, not quarterly earnings. The problem with all of this stuff is that it’s really difficult to find out and understand…and if you’re lazy, well you’d rather just pick something easy and use that as a metric instead of doing all of this work.
The amazing thing is that all of this laziness has led to a lot of people making a pot full of money. You see these guys have done something ingenious: They’ve created a framework which has nothing to do with the real value of the companies they aim to judge, they’ve agreed that this framework will be the basis of setting prices, then they’ve told the public a different story so they can fund the entire scheme with other peoples’ money. This is why you often hear Wall Street professionals saying that the system is rigged against the “little guy” meaning the retail investor. It’s all like an agreement that they’ve made amongst themselves. Quarterly earnings don’t really matter, but if we Wall Streeter’s all decide they matter, then we can trade in and out of companies as if they do, then prices will move and we’ll make money. Retail investors can’t do that. They have other jobs to do. That system only works for you if you trade stocks all the time, all day long as a professional. It’s like they’ve told the public “buy equity in quality companies and you’ll make money” then they set up the system so that making money has nothing to do with the quality of the company, only with the short-term price changes driven by the irrelevant metrics that they’ve created.
Just my two cents but time for things to change on Wall Street if you ask me.
