Reporting Profits Daily Would End Corporate Short-Termism
Think there’s too much hoopla about quarterly earnings? Imagine if the circus moved to twice a year
Bloomberg, August 20, 2018
Want to Make Earnings Great Again? Report them daily.
My column at Bloomberg today looks at that issue. Ever since President Trump proposed that the SEC “consider allowing public companies to share information with investors less often,” i.e., 2X per year, I have been thinking about the repercussions of this.
I believe it is exactly backwards.
My experience has been that more frequent reporting makes the data less significant. In the real world, human behavior emphasizes rarity – meaning doing something less frequently gives it an even greater significance than something which has become a common occurrence.
Here is a real-world experience about the perils of performance reporting. Some years ago, I worked at a firm that reported quarterly numbers of how well their investments had done. Like clockwork, every three months we had to send out the quarterly numbers. Each client household would receive a full “dead tree, snail mail” update: multiple accounts, benchmarks, capital additions or withdrawals all had to be accounted for. Sometimes the portfolio beat the market, often it did not. After the personalized report would go out, the phones and email would light up with questions.
The focus on those short-term numbers every three months was an unhealthy obsession among clientele and employees alike. Because it was only quarterly, preparing the documents for all of the numbers to go out became a Very. Big. Deal.
When we launched our firm, I wanted to avoid that issue. We did two very important things that I believe shifted the focus away from the short-term towards a much healthier time horizon.
First, we built in creating a long-term financial plan from the earliest discussions of our portfolios with prospective clients. This allows the regular noisy short-term numbers to be put into proper context. The key question became not short term performance but whether or not you are on track for meeting your long-term goals. How well or not the S&P500 did the past few months, and how closely we tracked that metric, became much less relevant.
But emphasizing long term planning alone is insufficient. The secret is to provide even more performance data – not less. Working with a software vendor, we give every client an application that allows them to see exactly how well they have done on a daily, weekly, monthly, quarterly and annual basis. Its updated after every market close, and perhaps one day in the future it will become real time.
Here is the funny thing: once 24/7 access to performance data became available, including relative to all applicable benchmarks, PEOPLE STOPPED CARING ABOUT QUARTERLY NUMBERS. The unhealthy short-term obsession simply disappeared, to be replaced with a simpler but even more important question: “am I on track to meet my longer-term goals?”.
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See my full discussion of quarterly reporting at Bloomberg.
