Short-Termism Is Harming the Economy?
wsj.com
wsj.com
https://www.cnbc.com/2018/06/06/warren-buffett-and-jamie-dim...
So, for common folk? Or do they mean people, who do it professionally?
https://en.wikipedia.org/wiki/Pattern_day_trader
And usually when day trader is referred to in the financial industry, what they really mean is a professional trader that moves high volume for one person (you can technically be a pattern day trader at relatively low volume).
Someone correct me if I’m wrong.
Stock dropped like a rock the next morning as if we were sure to close up shop or something the next quarter because we provided no guidance.
Even better the following quarters some silly stock people put out notes that we missed the predicted numbers. The numbers, they just made up their own predictions, and put that in the press release where they used to note guidance we used to provide.
But they were solid earners until then as they had put themselves in a good spot and provided outstanding service (well that was me and my buddies). Stock never did much as wall street was entering the phase of demanding short term growth for no apparent reason all the time.
I hate how consensus analysis turns out like a dictat from the high priesthood - you must jump this high even though you forecasted something completely different.
The problem is one of informational asymmetry to reward the connected/wealthy.
Why would he be damned if he does? Because he knows things don't look good. In that case, it makes perfect sense that the stock drops like a rock. Am I missing something?
Then again if he played the game and played down expectations stock would drop just on that prediction and wall street's own made up numbers never adjusted to his predictions anyway.... so things would at best be flat.
Generally he was just tired of it all I belive. This was after the .com crash and they had weathered that really well compared to many companies but also this was the time when Wall Street was turning into "short term lots of growth only please" kinda folks and our company was plenty profitable but never going to grow massively.
- during earnings provide extremely positive guidance for next quarter. this will bump stock up
- as time goes by, slowly update your guidance downwards. if this process is slow, hopefully stock won't be very affected. repeat this until you're convinced that your public updated guidance is below your private earnings predictions.
- when earnings come, you'll over-shoot your depressed guidance. This will bump stock up. Again, provide extremely optimistic guidance for next quarter.
The pressure to meet short-term earnings estimates has contributed to the decline in the number of public companies in America over the past two decades.
Anyone know paper/article which provides evidence for this? My assumption is that the number of public companies is lesser more due to consolidation is various sectors.
He is a tireless advocate of stock prices reflecting actual value of the company (and his modus operendi is to know the actual value and buy great companies when they are at a substantial discount to it). He split BERK into BERK.A and BERK.B when the stock price got so high that people were speculating on it and it no longer reflected the intrinsic value. He doesn't say what the intrinsic value of BERK is, but he reports book value every year and has a standing order to buy if it is 1.2X book value or below, which puts a floor on what he thinks the intrinsic value is.
He also strongly believes in management thinking long-term instead of short-term, and frequently says so in his shareholder letters. This is entirely consistent with his philosophy. If you want vested interest, his buy-and-hold strategy does best when management considers long-term growth rather than short-term manipulation. However, he thinks it is better for shareholders in general, not just himself. Given that he's giving away all his stock after he dies, which can't be that many years from now, he isn't doing this for monetary gain.
I don't think you've paid attention to what Buffett does to make money in the last decade or two. He targets companies that are or may be desperate, and tries to exchange his endorsement for things like preferred stock and warrants at unbelievably favorable terms. He did this with Goldman Sachs during the financial crisis. He tried to make a deal with Uber recently. He is absolutely nothing like the folksy myth you reference.
Bank of America and Goldman Sachs came out of it in stellar condition. Both are printing record profits. Like I said, a win all around.
Uber isn't in a desperate position, thus they turned Buffett down. They're loaded with immense amounts of cash, and have no problem raising more.
So your sole examples to claim an outsized pattern of behavior, come from the great recession.
Otherwise, we have: the acquisition of Precision Cast Parts for $37 billion, buying Pilot Flying J, buying out Iscar, acquiring Duracell, acquiring Van Tuyl, acquiring NV Energy, funding the merger of Kraft Heinz and holding a huge position, Lubrizol for $9.7 billion, and Burlington Northern (2009).
A hundred billion dollars worth of acquisitions over a decade.
On the investment side: a massive investment into Apple, on a bet that they're a strong company and will continue to spit off vast profits for a long time to come. A large investment into IBM (sold). Investments into Southwest Airlines and other airlines. And so on, without another single example of your premise.
I wasn't debating his ethics, just saying he does not make money by simply buying solid businesses and holding them forever.
He has a collection of solid businesses that provide cash and allow him to collect large amounts of money on rare occasions in special situations because he's the last resort. It even has a name: "The Buffett Premium".
He made $3 billion on GS, $12 billion on BOA, some 70% on HCG...he's been called a loan shark, and that is enabled and complemented by the solid companies owned by Berkshire Hathaway.
Article about his investments in banks: https://www.fool.com/investing/2017/07/05/a-timeline-of-warr...
Which is less than this year's $4.1 billion bonus pool at GS. So hardly a "loan shark".
Furthermore he made the $3 billion by converting warrants to common stock, so it's actually not like GS paid out of capital or profits. Perhaps GS stock was diluted somewhat by issuing new shares? (Not sure.)
I don't know if Buffet did anything that is considered fraud but I would love to read about it.
> He is a tireless advocate of stock prices reflecting actual value of the company (and his modus operendi is to know the actual value and buy great companies when they are at a substantial discount to it)
Both sentences don't go together. If his modus operandi is what you describe then it is in his vested interest to ensure markets don't price the actual value of large number of companies.
For one moment let's assume Buffett's intentions are pure but can we say the same thing about Dimon?
But I would like to offer a counterpoint to one of your claims. You say that Buffet has a vested interest in having the ability to buy a $20 stock for $13.
He does have this interest, but all of us do too. Additionally, he doesn't really have the ability to influence this change any more than we do.
If a public company is selling at $13 when it should be $20, then anyone has the ability to buy as much of that stock as they want. There's no secret back channel.
For example, last year, Sears was trading at $10. Now it's at $3. I shorted it and made money, because I was betting that Sears would continue to decline.
If it was such a sure bet, why didn't Buffet use his magical manipulation powers to short the stock with me?
Not entirely stable!? Well, I'm glad you're here to tell us these things. Chewy, take the professor in the back and plug him into the hyperdrive.
1.) The only time new information really comes out is during quarterly earnings, and that's also when prices are most volatile and jumps the most. If you make it annual, then an entire year has gone by before new information has come out, and the floodgate of 12 months of data will force the price to jump even more. If a company misses an entire year of earning, it's stock is pretty much done for a while. That would seem to make it even more urgent for CEOs to manipulate their prices
2) Frequent releases help level the playing field between big institutional funds and smaller players (as much as they can be leveled). In the absence of public info, the ones with most resources can spend money to get more valuable data - field research, product analysis etc. Ex: Because the data is so valuable, it might be cost effective for a $50 billion fund to hire hundreds of people to literally stand outside a bunch of Chipotle chains all over the country and count how many people eat there. You could spend up to $20m for that data and make a huge trade based on it.
3.) You can already sort of ignore the quarterly earnings. You can tell analysts to shove it and not provide guidance and just release the minimum for SEC mandated quarterly releases without any discussion or call. You can focus on investing long term and ignore the earnings for each quarter. You can also ignore the short term price drop that comes with not providing those information. Then at the end of the year you can do a long call and go in depth. If you do this, you essentially follow the model described in the article without forcing everyone to do the same.
3x more reports = more burden, right?
Closing the books at large companies still takes time and manual effort as well.
Heres a snapshot - monthly financial closes often require forward or reverse accounting so things are properly budgeted and balanced.
A trial balance report is easy to run, but then the numbers have to be reviewed & approved and discrepancies resolved.
Still, from an ignorant outsider's POV, it would be interesting to run towards the pain. My instinct is that smaller batch sizes are better overall.
Then there are other transactions. Is this capex entry really capex or should it be opex? Well, we need a meeting with a technical accountant.
There have been a lot of steps toward automating accounting, and most (lets say 95%) of transactions are instant and require no intervention.
The 5% remaining require human intervention. In order to close the books faster you would need to either figure out a way to automate the rest (really hard) or hire a bigger finance and accounting staff who would then be idol most of the month.
I dont work in accounting, I work in FP&A, so I am sure there are other examples I dont know about.
The problem is with maximizing the stock price in the short terms versus in the long term. And it is all up to CEO to communicate his plan and then pressure on earnings will be less.
Why are financial reports split into quarters?
The fact that we split financial data itself into quarters is what drives this short-termism. You now have an official timeline on performance metrics.
Databases can track financial data in real time. Just give real-time information, and let each stock trader use their own measure of financial performance, whether it's hourly tracking for day-traders, or years-long tracking for long-term investments.
When a company releases their quarterly reports they're certifying that the information contained is accurate (and audited). That would be nearly impossible realtime.
It's not an impossible problem.
(Also, I wonder if most corps would even want it; real-time doesn't leave much space for fudging numbers and other shenanigans.)
Corporations are interesting beasts. They don't always want improvements. For instance, I've heard from people selling "cybersecurity" products to enterprises that customers worry that when a system points out a potential vulnerability and later it gets exploited, they can no longer tell regulators and insurers that they didn't know - so in the cost/benefit calculations, improved security competes against plausible deniability...
Don't get me wrong, there's probably benefits to having it in real time but I think it'd make any top exec job a nightmare.
Suppose you found out Netflix had a $1 billion cost expense in real-time. The market would react to it faster than you or I could anyway. By the time you knew about it, the stock would have plummeted.
You might have missed the actual problem; people aren't interested in these numbers because they like numbers. They are interested in these numbers because they want to make decisions based on them. The problem is that traders want early warning of change to position themselves in the market. Large volumes of low quality data won't help them. Spitting out unreconciled data that the company doesn't intend to stand by is basically the same as doing nothing.
If there are no surprises, the numbers are basically worthless. A decision made off the last quarterly report would be just as good.
If there are surprises, this is exactly the sort of thing that needs to be audited or reconciled. Surprises are probably going to be mistakes that would normally be weeded out when preparing a quarterly report. But if data were sent out in realtime, activity will take place based on essentially fake data. What happens if a bank communicates that they have run out of cash because of a software glitch in their realtime reporting? The situation would not end well for the bank; that could theoretically trigger a bank run.
Realtime data might be nice for some traders, but realtime mistakes could lead to some pretty terrible outcomes.
External outlooks rarely provide value to wall street.
They are internally time consuming for FP&A.
I'm confident that they take time and mindshare away from CEOs that could be spent on improving the company. Further, new CEOs usually have no experience with Wall Street so they must learn on the job which further exacerbates the time and energy required.
I hope that this gains traction as it will help all companies become more productive.
Of interest, on page 2 there is a survey result: "87% of executives and directors feel most pressured to demonstrate strong financial performance within 2 years or less", and "55% of executives and directors at companies without a strong long-term culture say their company would delay a new project to hit quarterly targets even if it sacrificed some value".
But if that was the article it looks like from the headline? Give it. Away. For a minute. FFS.
The question of how journalism can be commercially sustainable is a very important one, but it's separate to the topic at hand :)
http://paulgraham.com/submarine.html
I'm not sure I agree with the assessment for this story. What would it be PR for? The stock market? Warren Buffett?