By Heather Douglas
“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” Warren Buffet, (1930 –), quoted in Business Insider (August 31, 2014); American business magnate, investor, and philanthropist.
Investors want to buy shares, at a reasonable price, in an easily-understandable company whose earnings are almost certain to be higher five and even 20 years from now. Anyone not willing to hold an interest in a company for a decade, should not think about keeping it for 10 minutes, says Buffet, arguably one of the world’s most successful investors.
“To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets,” Buffet penned in his Chairman’s Letter, 1996. “You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses – how to value a business, and how to think about market prices.”
The quarterly earnings press releases are often overwhelming to investors, especially on days when a multitude of companies decide to issue their latest missives.
Worse, poorly written releases are used to manipulate investors by encasing bad results in murky language, says a study published in The Accounting Review. “The greatest danger to investors may not be the low readability per se, but that managers use it opportunistically to obfuscate unfavourable benchmarks, while embracing clarity for favourable ones that are less important,” says co-author Elaine Ying Wang of the University of Massachusetts Amherst.
Journalists also detest the obfuscation. “Reporters, like many investors, hate the jargon, vacuous quotes from the CEO and CFO, numbers that don’t add up, figures that are missing, tables that are confusing, and boiler-plate legalese that’s endless,” says the team at MarketWatch. “For the uninitiated, earnings releases are a headache.” MarketWatch should know. It’s published by Dow Jones & Co., and tracks the pulse of markets for engaged investors, with more than 16 million visitors every month.
Do companies manipulate the timing of their quarterly reports for strategic reasons? And are there times when stock traders, analysts, and the media are less attentive?
They, like us, are tired of the shenanigans that some public companies pull — demanded by less-than-honest executive teams — to deceive the investment community, when they announce their quarterly and yearly earnings. These are the dozen tricks we consider most egregious:
• Releasing bad news late Friday, on a long-weekend, in the hopes that by Tuesday, when the markets open, investors won’t engage in a massive sell-off of shares;
• Dodge the “full and fair disclosure” rules, by burying bad news in the final paragraphs or using words or phrases to mask what is actually happening – red flag words such as challenged, pressured, slipping, gross margins are declining, pricing pressures, to name a few;
• Highlight what management wants to focus on and force the reader to play detective and dig into the details to discover what’s really happening;
• Increase stock buybacks is a legitimate tactic (this is not a blanket condemnation) but some boards do this as they announce bad news to make their stock appear more attractive than it is;
• Report good news to counterbalance the bad – the company announces the hiring of a new CFO to mask its poor hedging strategy;
• Hide the numbers forcing investors and reporters to click through multiple links to find the data needed to assess the company’s value;
• Flip the table highlighting the older numbers and hiding the newest numbers (usually bad);
• Publish too many numbers – readers get lost in the GAAP and non-GAAP earnings, nonrecurring items, and few understand what this phrase means — “income from continuing operations attributable to noncontrolling interest;”
• Write an idiotic executive quote about what a fabulous quarter the company enjoyed because it is led by such an amazing, magnificent, and extraordinary group of executives;
• Ask readers to add the numbers themselves using such phrases as “impact per diluted common share (EPS) as an item affecting comparability that had to be added to the diluted EPS and then adjusted to match the consensus.” Seriously?
• Issue a long (more than two-minutes) video to deliver good news (naturally full of management mumbo jumbo); and
• Warn the company won’t meet market expectations, beating those forecasts, and repeating this behaviour again and again – no one believes anything you say now.
Yet we’re not always curmudgeons. Occasionally we receive a press release that brings us joy. Why? It’s thrillingly concise, tells an interesting story about the company’s activities, gives well-defined and thorough numbers, and management quotes are in clear, comprehensive English. We smile delighted. It’s obvious why the stock market invests in them.
There are no idiots running those organizations.
#HeatherDouglas #TheRoughneck #investors #news #press #pressrelease
