Leave it to Jamie Dimon, chairman and CEO of JPMorgan Chase & Co. (JPM, Financial), to light a bomb in a packed room of Wall Street analysts at an investors' conference in New York.
It happened just as his "Bitcoin-is-stupid" comments could barely collect dust. Dimon believes there’s yet another reason for being “stupid” on Wall Street.
After a Q-and-A session, Dimon turned the tables on conference participants.
“Can I ask you all a question, real quick, a show of hands, how many of you are in favor of companies forecasting quarterly and annual earnings?”
Pause.
“How many of you think it’s a good thing if we got all companies to drop it?”
Pause.
“The ayes have it. I’m going to get people to drop it. I think it’s one of the problems … Can I tell you why it’s stupid. Would you like to know?”
After a roar of nervous laughter, Dimon proceeded to tear down the age-old practice of forecasting earnings as part of “guidance.” In guidance, publicly held entities offer investors a “forecast” about what they believe their earnings “target” will be in the months to come. In many cases, companies who exceed the forecast “beat” it; while those who don’t, “miss” it. Critics, including Dimon and even Warren Buffett (Trades, Portfolio), say the practice leads to data manipulation by CEOs and corporate boards under pressure to show they are running things right.
Cost of cheese
Dimon says it’s better to report actual numbers based on years of performance than to disclose a number each quarter that can be tinkered with and is merely a forecast of evolving expectations.
“Earnings are a factor of all your input and output prices, volumes, even the weather,’’ he told the conference participants on Tuesday. “When it snows in New York, the equity volume trading is down.”
JPMorgan executives may go into complex and long-term data analysis about the global bank’s sales force, its size, spending and goals.
“But we can’t forecast the accuracy of earnings,’’ Dimon said.Â
Critics agree
Dimon isn’t the lone wolf inside a company of Wall Street investors and leaders. Buffett launched an effort less than two years ago to force companies to stick to “actual” figures rather than “forecasts.”
In 2016, Buffett unveiled the idea to a number of key investment firms, including T Rowe Price. But apparently it didn’t gain traction as the practice to forecast earnings still continues today.
In a televised interview, Buffett expressed disfavor with the practice, going as far to say that it can lead to “a lot of malpractice.”
He gave an example of how forecasts can be manipulated.
“If a CEO goes out and says we’re going to earn a dollar and six cents next quarter; if it’s going to come in at a dollar-four, there might be a lot of attempts to find a couple of extra pennies in some places,’’ Buffett said. “There are ways you can move earnings toward the end of the quarter, sometimes even after the end of the quarter. I’ve seen guidance produce some bad results.”
Buffett said he understands that companies operated under different rules and strategies.
“I’m not saying don’t do this, you’re dead wrong,’’ Buffett said. “I’m just giving encouragement to companies that really felt uneasy about giving guidance and perhaps have more backbone about it.”
