Despite an unusually calm stock market year in 2017, the market players this year are still quite nervous. This has given rise to significant price fluctuations on the stock market whenever the turnover and profit forecasts were either not met or surpassed. Fluctuations can quickly trigger two-figure price reactions, especially for smaller companies. The observation here is that negative deviations are usually penalised more severely than positive deviations. In my view, these unpredictable price jumps cause totally unnecessary market fluctuations. This is why I’m not a big fan of quarterly figures.
Short time frames of only three months are simply not enough to provide a solid basis of any significance. For smaller companies, a single postponed order may be enough to impact the turnover and profit within the quarter. Or consider the fact that statutory holidays may occur at ‘inconvenient’ times for companies. If two working and days of sales go missing during a quarter due to holidays, the figures will be impacted. The figures for the entire fiscal year are fundamentally important, and halfyear figures are helpful as a short-term interim check, but three-month figures are not useful to anyone. Their significance is way too low.
My second point of criticism is that it generates far too much work for the company. Each quarterly report ties up management capacities and overloads the administrative bodies within the company. The accounting department often strings itself along from one quarter to the next. There is no time left over for the actual operational activities. And my biggest criticism of all is that companies are practically forced to take a false perspective. Since the stock market (unfortunately) pays such close attention to the quarterly figures, many companies are focused on reaching their three-month objectives. Any measures that put these objectives at risk are suppressed. But a timeframe of three months is not critical for the sustainable development of a company. The management must have their sights on the coming years, or even decades in the case of large investments, and not just the next twelve weeks.
The same applies to the stock market: well meant isn’t necessarily well done! The company’s quarterly reports were intended as a nice plus for shareholders. But in the hectic era of the Internet, in which stock market decisions are sometimes made in less than a second, they alter the perspective far too drastically. Now companies are also becoming increasingly critical of ‘quarterly thinking’.
This year, Warren Buffett, the legendary CEO of the holding company Berkshire Hathaway, and Jamie Dimon, CEO of the highly influential American bank JP Morgan, spearheaded the movement. One specific example: Buffett and Dimon continue to present quarterly figures, but they do not provide quarterly forecasts. This is at least a first step in the right direction. Buffett explained his reasoning behind this move: “When managers only care about meeting the targets, they often neglect the longterm interests of the company.”
As private investors, we can’t stop the insanity of quarterly figures, but we can view them with greater composure. That alone will ensure a calmer approach and more sustainability when making investments.
About the Author:
Since 2002, the analyst Rolf Morrien is editor in chief of the investor service "Der Depot-Optimierer" and author of the books "How do I invest 10.000 Euro optimally?" and "Stock Market Easy to Understand".