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Short-termism

July 18, 2006 | About:
Charles Mizrahi

Charles Mizrahi

19 followers

I could never understand the logic of multibillion-dollar corporations with tens of thousands of employees, in offices around the world, offering quarterly earnings estimates. How is it possible that they are able to provide an exact number for their earnings every quarter? Even more puzzling, how is it possible for securities analysts to even target what earnings are going to be every quarter? There are so many different variables that it seems impossible to predict, yet many times analysts hit the nail on the head right down to the penny!

There is a trend now in boardrooms of publicly traded companies to stop this nonsense. The National Investor Relations Institute (NIRI), in a March survey, said that publicly traded companies giving out quarterly earnings guidance fell to 52% from 61% a year ago. Many are coming to realize that offering quarterly guidance promotes what Louis Thompson Jr., president of NIRI, called “short-termism.”

Giving earnings guidance, especially every 90 days, does more harm than good. If the focus is on “beating the numbers,” then corporate managers are focused on matching or exceeding a number every quarter, and that has them taking their eye off of managing the business for the long term.

Woe to the company that misses its earnings forecast by one penny. Many times the stock gets pummeled. Billions of dollars of market capitalization can be lost in less time than it takes to drink a cup of coffee and all because of one penny.

Some big-name companies no longer give quarterly guidance, companies such as Motorola (MT), Coca-Cola (KO), the Washington Post Company (WPO) and Campbell Soup (CPB). A few years back McDonald’s led the pack by ceasing quarterly and annual guidance.

This is a trend that I hope continues. Investors and corporations should stop focusing on the short term and realize that the big money is made over time.

About the author:

Charles Mizrahi
GuruFocus - Stock Picks and Market Insight of Gurus

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Comments

Stephen L. Martin
Stephen L. Martin - 8 years ago
Agree completely...however, the ango-saxon world is structured around short-termism...companies report quarterly, politicians are elected for short, finite periods and media operate on short, easily digestible pieces of information. In short, this perspective is pervasive throughout our society. Perhaps companies should report annually and capital gains tax eliminated for securities held for a certain length of time. Furthermore, maybe our politicians would become leaders if they had more time to focus on leadership than in trying to win votes!

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