Market Overview

Mark Cuban, Others Agree With Dimon, Buffett's Criticism Of Quarterly Guidance

Mark Cuban, Others Agree With Dimon, Buffett's Criticism Of Quarterly Guidance

Warren Buffett and Jamie Dimon stirred the pot with their recent call for corporations to end the issuance of quarterly earnings guidance.

"In our experience,” Dimon and Buffett said in an op-ed for the Wall Street Journal, “quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability."

Skeptical Reception

Financial pundits didn’t waste time responding: the proposal was called balderdash, hypocrisy and meaningless.  

Some asked why companies should end guidance but continue to report quarterly earnings. Buffett and Dimon, themselves the chief executives of Berkshire Hathaway Inc (NYSE: BRK-A) and JPMorgan Chase & Co (NYSE: JPM), were treating other CEOs like children, others said.

Another take: guidance — or rather the reaction to guidance — is merely a symptom and not the cause of the short-term thinking plaguing markets.

See Also: Analysis: Officials Warn Non-GAAP Financial Measures May Lack Credibility

Notable Supporters

The Buffett-Dimon Doctrine found some voices echoing its concerns though, to one degree or another.

Elliott Management’s Paul Singer told the crowd at The Deal’s Corporate Governance conference that he agrees with the didactic duo and sees no benefit to quarterly guidance.

Recall what GameStop Corp (NYSE: GME) had to say in March 2017 when it announced it would provide only annual guidance going forward.

“We believe that providing only annual guidance will reduce investor distraction,” the company said in in its Q4 earnings press release. The company added that this move would help the organization concentrate on “longer-term targets” and reduce focus on “short-term results.”

Sounds familiar.

Throwing Out The Baby With The Bathwater?

Many companies might argue quarterly guidance helps improve investor relations, gives shareholders a chance to grade management’s ability to set and meet expectations and reduces volatility.

"This is the average person's window into the company," TD Ameritrade Holding Corporation (NYSE: AMTD) Chief Market Strategist JJ Kinahan told Benzinga. "If you don't do this, how are people supposed to make decisions?"

Kinahan said he sees Buffett and Dimon's point and is equally wary of corporations managing for the quarter.

"It's a good point and there are smart people making it, but it doesn't have to be all or none. There has to be a compromise in there," he said. 

So where might there be room for compromise?

“I think it would be smart to end quarterly earning conference calls,” investor and entrepreneur Mark Cuban told Benzinga. “I don’t think they serve any purpose beyond being a platform for analysts to market themselves.”

Cuban shares Buffett and Dimon’s concern that the prospect of kowtowing to a short-sighted market diminishes the allure of going public at all, which could have broader negative implications. Fewer IPOs means reduced opportunity for the average investor to participate in the success of American business through the market, their 401Ks or index funds.

There are other consequences. “Fewer public companies means fewer employees and investors get a chance to participate in a liquidity event and fewer companies stay independent,” Cuban said.

Ending guidance altogether, though, could put retail investors at a disadvantage to others with whom corporate management talks.

“Companies should offer the same type of insights they offer their private interests,” Cuban said.

See Also: A Look At Investor Psychology Ahead Of Important Events

Ask An Analyst

How would ending short-term guidance affect the work of a sell-side analyst? Perhaps not that much — for any analyst not stuck “worshipping at the altar of EPS,” as the saying goes.

“I don’t really care about quarter to quarter, and good managers don’t either,” Tigress Financial analyst Ivan Feinseth told Benzinga. “I look at things that are much more long-term.”

Feinseth agrees that the pressure of short-termism causes some creative accounting on the part of some managers.

“If you know you’re going to miss numbers, you can take down reserves for doubtful accounts, reduce R&D expense, marketing expense. There’s all kinds of things you can play with.”

All of which is detrimental to the firm’s various stakeholders. Imagine being the shareholder of a cutting-edge tech firm in a competitive field. Would you want your managers reducing research and development spending just to goose EPS a cent or two to protect the stock from the algorithms that react to quarterly beats and misses?

“Company plans cannot be made or managed in three-month increments,” Feinseth said. "They’re made and managed for three-to-five-year increments.”


Related Articles (DIA + SPY)

View Comments and Join the Discussion!

Posted-In: Analyst Color Education Guidance Movers & Shakers Psychology Top Stories Exclusives Media Best of Benzinga