Getting rid of quarterly guidance won't solve Wall Street's problems.
Famed investor and Berkshire Hathaway Inc. (BRK.A) (BRK.B) CEO Warren Buffett and JPMorgan Chase & Co. (JPM) chief executive Jamie Dimon put forth a plan this week in which they floated that very idea, calling for an end to quarterly earnings forecasts in corporate America.
Dimon and Buffett wrote in a Wall Street Journal op-ed that they don't believe quarterly earnings forecasts do anything positive for companies; rather, the practice breeds short-termism in the market.
"In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy, growth and sustainability," wrote Dimon and Buffett.
"Companies frequently hold back on technology spending, hiring, and research and development to meet quarterly earnings forecasts that may be affected by factors outside the company's control, such as commodity-price fluctuations, stock-market volatility and even the weather," the executives added.
And the dynamic duo aren't necessarily wrong. Halting quarterly guidance could remove the short-term albatross around corporate America's neck, allowing them to instead focus on actually achieving long-term goals instead of throwing darts.
But the problems with guidance mask other issues.
As Cynthia Johnson, director at Office Depot (ODP) , Darden Restaurants (DRI) and Big Lots! (BIG) and chairman at Tractor Supply Co. (TSCO) , said at The Deal's Corporate Governance conference on Thursday, guidance isn't the problem.
"I think it absolutely would [build long-term value] but I think it's idealistic to think it'll ever happen," Johnson said of Buffett and Dimon's proposal.
"Here's the problem. I think there will be demand for it, but I also think if I could wave my magic wand, it wouldn't be the quarterly guidance that's the issue. It'd be the overreaction to it once people hear whatever the news is."
Wall Street waits four times each year with bated breath to hear what companies expect on the sales and profit fronts for the next six and 12 months. Guidance is often what drives a stock way higher or way lower during earnings season, not necessarily beating estimates.
But asking Wall Street to give up its decades-old practice of waiting for those fateful forecasts is a useless means of market reform. There will always be something that market watchers latch onto in financial filings. If it isn't quarterly guidance, it'll be something else. Like Johnson says, overreaction is what's off kilter.
Both the buy- and sell-sides all too often find themselves stuck in the business of predicting the future -- they'll no doubt find some aspect of corporate America to inform their analysis.
What's more, "The number of S&P 500
According to Butters, over the past five years, 108 S&P 500 companies on average have issued quarterly earnings guidance. Over the past 10 years, 100 S&P 500 companies on average have issued quarterly earnings guidance.
And yet, Wall Street persists in its endless quest for directional insight. As Butters' data illustrates, earnings season market momentum is inevitable -- about one-fifth of S&P 500 companies offer guidance, but still investors rely on financial filings quarter after quarter.
"Without getting into the merits on either side, eliminating quarterly EPS guidance may not have a widespread impact on the short-term versus long-term debate," Butters said.
Perhaps the merit in Buffett and Dimon's proposition is more in the idealistic than the material. Companies should look ahead and focus on long-term value addition. But, so long as markets operate under their current structure, that won't stop short-term market gyrations.
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