NEW YORK ( TheStreet) -- In my first Investing 101 article, I talked about the importance of communication between corporate leaders and shareholders. Specifically, I highlighted why investors should find out who, and what, they're getting in bed with.
My goal was not to be cynical. While I do believe the majority of CEOs do conduct themselves with some modicum of honesty and integrity, the Enron bankruptcy taught us to appreciate the things CEOs say with a bit of skepticism until the evidence proves otherwise.
In this article, we will uncover ways investors can pick out "management speak," also known as "corporate jargon," or words that sound good but are often filled with superfluous non-achievements. Let's find the true meaning of vague statements like, "We're taking action to improve execution" so that investors can arrive at what it is that really moves the business and company forward.
Take, for instance, that particular quote above, which was coined by former BlackBerry (BBRY) CEO Thorsten Heins, who was also notorious for using terms like "build and invest in the future." Heins often talked about how his company was "focusing on vertical specific opportunities." Never mind that he stopped short of offering any meaningful detail regarding these ideals, his words were nonetheless interesting. Unable to transform his vocabulary into meaningful results, Heins was fired five months later.
In fairness, though, Heins is not alone in "talking the talk." For instance, although IBM (IBM) commends a great degree of the Street's respect, the company has grossly underperformed over the past couple years, particularly against much nimbler rivals like Salesforce.com (CRM) and Workday (WDAY), two fast-growing rivals that have taken over the cloud.
As with the vague statements made by Heins, in response to recent threats to explain IBM's recent 4% revenue decline, the company's CEO Ginni Rometty said, "We're going after higher margin businesses." Investors seemed content with the statement. What does that even mean?
I appreciate that there's a certain degree of faith one should have in our corporate leaders, especially those the caliber of IBM with an above-average track record of strong cash flow production. But empty terms like "we're taking action to improve execution" are only as good as the implementation behind it. Retail investors should demand clearer language.
It's bad enough to have to dig through piles of documents to truly understand how companies make money. Investors shouldn't also have to decode the meaning of terms used during conference calls. Along those lines, investors should start demanding that management make their accounting as easy as possible to understand.
Given the complexities with GAAP and non-GAAP reporting, not to mention things like currency exchange rates and the impact on revenue, I do realize that not every investor will ever truly understand everything about the companies in which they've invested. That should not take away the responsibility management has to educate its investors on how all of the company's metrics are calculated, not just those that paint a prettier picture.
Investors also have a responsibility to educate themselves on the performance standards that really matters in various industries. There's more to certain companies than just gaudy revenue and earnings-per-share growth numbers. Along those lines, if these numbers are said to have "missed estimates" (that gets thrown out a lot), it doesn't mean it was an awful quarter.
This is where executives who take the time to educate investors on the issues that formulate their decisions get rewarded. Having set clear expectations and measurable outcomes, investors in these companies rarely selloff the stock after one or even two bad quarters.
Essentially, from the clear communication that has taken place, investors are easy to appreciate that management's long-term plan can remain intact - regardless of whether estimates were "missed." And this brings us to another form a communication called "guidance" or how the company forecasts its performance.
While the Street seems always ready to either reward or punish companies for having "missed," investors should realize that these predictions -- even those from the company's management -- are only best or worst case scenarios. Let's not forget that there are tons of moving parts that go into these statements. We should hold management accountable for their words but recognize that they're not fortune tellers.
To that end, investors shouldn't discount how foreign economies can sway a company's outlook from one quarter to the next. I don't think CEOs are able to predict the exact date of when a government shutdown will occur and when it will reopen. And device giants such as Apple (AAPL), which is often criticized for its supply chain, can't often control parts availability. Not to mention the constants PR gaffes that exists at its biggest supplier FOXCONN (2354.TW).
Suffice it to say, words do matter in the world of investing. But investors shouldn't get complacent about educating themselves about what's really importing in investing. It starts with demanding clear disclosures from the company's management. Investors should always thirst for better understanding of the metrics that drives their industry. This is the only way to profit off of, instead of succumb to, greed and fear.
At the time of publication, the author was long AAPL.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.