"When the measure becomes the target, it ceases to be a good measure." Something something something.
Forwards looking earnings guidance is also a pet peeve of mine - I've had plenty of stocks take a significant decline because a given company was a few or even a single percentage point shy of what they'd predicted from the previous quarter.
Assuming accurate predictions can be made is foolhardy, and if a company actively makes changes to meet the prediction that are at the cost of long term profits, it doesn't help anyone but day traders, the worst of the worst.
Of course a stock will decline when news is worse than expected. The same way it rises when news is better than expected. And there are always going to be, and should be, expectations.
So I'm not really sure what's supposed to be wrong with that? That's how stocks have always worked, and will always work.
The funnier scenario is when the company beats their earning predictions, but the stock drops because analysts were predicting that they would beat their predictions by even more.
That shouldn't be surprising at all when the price of the stock is based on investors' expectations, and it's possible for analysts' guidenaces to hold more sway than the company itself. For instance if the analysts' guidance was issued later
> First, eliminate forward-looking earnings guidance. This practice forces companies to make public commitments about future performance, creating enormous pressure to meet those predictions regardless of changing circumstances.
Honest question - are companies forced to make forward looking projections? I would have assumed the whole reason they have a legal safe harbor for making forward looking statements that turn out to be wrong is because companies WANT to be able to make these projections as an IR exercise, but maybe I’m wrong.
> Second, create accounting treatments that allow companies to separate long-term innovation investments from operational expenses, giving investors clearer visibility into both current performance and future potential.
I am fairly sure that every accounting rule that exists is because someone has abused the numbers, but OK, let’s give companies more freedom. What could go wrong. (And wasn’t capitalizing opex basically what brought down WorldCom?)
> Third, develop new metrics and incentives that reward patient capital deployment and long-term value creation, not just quarterly financial performance.
Ah yes, innovative metrics like McDonnell-Douglas’s “return on net assets.” Last I heard, they had taken over their biggest competitor. Mission accomplished!
Wasn’t this the guy who wrote some ridiculous piece about how HP buying Palm was a terrific idea but it all fell apart because he was out of the office or something?
Maybe the Matching Principle doesn't make as much sense as we thought. This is, in fact, the first time I've recognized that the Matching Principle leads to short term incentives. Hmmm, thanks.
"When the measure becomes the target, it ceases to be a good measure." Something something something.
Forwards looking earnings guidance is also a pet peeve of mine - I've had plenty of stocks take a significant decline because a given company was a few or even a single percentage point shy of what they'd predicted from the previous quarter.
Assuming accurate predictions can be made is foolhardy, and if a company actively makes changes to meet the prediction that are at the cost of long term profits, it doesn't help anyone but day traders, the worst of the worst.
Why is that a pet peeve though?
Of course a stock will decline when news is worse than expected. The same way it rises when news is better than expected. And there are always going to be, and should be, expectations.
So I'm not really sure what's supposed to be wrong with that? That's how stocks have always worked, and will always work.
The funnier scenario is when the company beats their earning predictions, but the stock drops because analysts were predicting that they would beat their predictions by even more.
That shouldn't be surprising at all when the price of the stock is based on investors' expectations, and it's possible for analysts' guidenaces to hold more sway than the company itself. For instance if the analysts' guidance was issued later
That situation is unremarkable, if you understand prices are a function of supply and demand, and supply and demand are always in flux.
Here are his recommendations.
> First, eliminate forward-looking earnings guidance. This practice forces companies to make public commitments about future performance, creating enormous pressure to meet those predictions regardless of changing circumstances.
Honest question - are companies forced to make forward looking projections? I would have assumed the whole reason they have a legal safe harbor for making forward looking statements that turn out to be wrong is because companies WANT to be able to make these projections as an IR exercise, but maybe I’m wrong.
> Second, create accounting treatments that allow companies to separate long-term innovation investments from operational expenses, giving investors clearer visibility into both current performance and future potential.
I am fairly sure that every accounting rule that exists is because someone has abused the numbers, but OK, let’s give companies more freedom. What could go wrong. (And wasn’t capitalizing opex basically what brought down WorldCom?)
> Third, develop new metrics and incentives that reward patient capital deployment and long-term value creation, not just quarterly financial performance.
Ah yes, innovative metrics like McDonnell-Douglas’s “return on net assets.” Last I heard, they had taken over their biggest competitor. Mission accomplished!
Wasn’t this the guy who wrote some ridiculous piece about how HP buying Palm was a terrific idea but it all fell apart because he was out of the office or something?
Maybe the Matching Principle doesn't make as much sense as we thought. This is, in fact, the first time I've recognized that the Matching Principle leads to short term incentives. Hmmm, thanks.