So, the Oracle of Omaha says.....

Red Badger

Red Badger

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STOP quarterly (or other short term) forecasts.

As a former long in the tooth supply chain manager, I always thought the quarterly hockey stick was a gigantic waste. Our factories, DC's, etc would incur thousands (or 10X that) of hard cost (at each location) to achieve revenue recognition. Across mega-c*rp it would be millions per quarter. And, we did the same game monthly for internal metrics (lots of folks goals measured that way...) Ultimately, this just added buried cost to our product, making us less competitive than we otherwise could have been (and likely diluting margis along the way).

Institutional investors might be well served examining a firms expenses and perhaps question if/why there is a spike said expenses four times per year. Key areas include; OT labor (direct and indirect), freight (both IB & OB), premium freight, OSHA recordables (tired workers increase accident rate).

What say the sage surfers of ER.org?:)
 
I think a problem is human psychology.

I suppose one could have weekly deadlines or have different divisions stagger deadlines so not all divisions have a quarterly deadline.

But people are not going to work hard until just before the deadline no matter what one does.
 
I think it may depend on the business. In businesses where the supply chain is relatively short or the inventories are very manageable it is likely a regular occurrence and adds major cost. DH worked for a mega corp where the factory floor was scheduled months in advance because of component lead times and manufacturing complexity. They attempted to drain the work in process at year end, but didn't really flex quarterly numbers.
 
I think that "guidance" will soon go the way of the dinosaur, and that is a good thing.

When I was in a Fortune 50 in the mid 80s it was much worse... we issued "flash" numbers within a few days of month end... a quick, dirty and preliminary view of the months results... and we were frequently asked to explain differences between "flash" and actual (which followed a number of days later). (all internal.. not external).
 
Quarterly reporting, "guidance," and analyst estimates are enemies of economic productivity.

Quarterly reporting is inherently "noisy" because the sampling period is so short. People think it means something, which tends to make corporate managment pay attention to it when they could be doing something else instead. Years ago I worked for a sub of Emerson Electric and Chuck Knight at that time was cultivating a reputation for increasing revenue every single quarter. All you had to know about Emerson's quarter you could learn by going down to Shipping. If they were running, shipping everything but their lunch boxes, the quarter was shaping up to be a little slow. If they were sitting around BS-ing, then the shipments were being saved for next quarter. They would even ship orders months ahead of the customer's need, knowing that the shipment would be returned, just to goose the revenue line.

"Guidance" is just stupid. The "guiders" are simply trying to manage expectations of the hoardes of ignorant "analysts."

"Analysts" are know-nothings who have never managed so much as a one car parade. And they are supposed to understand vast corporations and huge markets to such a high degree as to forecast quarterly profits? All they do is to contribute to the confusion and distract corporations from working on what is really important.

/rant
 
AMEN ! All my life in supply chain most all in the oilfield service business . We got bought out by a bigger east coast mega company who told us we were all wrong and we are going to do it like GE.
Guess what as fast as they jumped into the mess a 5 billion company plummeted to 1 billion and today they are looking for a buyer . The oil patch is based on who can get the product there first and perform a safe economical job . Because of this type of thinking we walked away from low margin business , but once again the mentality was if you can't do the low margin business you don't get the gravy .
If the forecasting and planning numbers said this than that is what we did . But we did it like GE
 
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audreyh1 said:
... we still need the reporting.
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That would be true if it meant something. IMO it does not.

Even annual reporting, which I agree is necessary, is noisy enough that it has to be viewed skeptically in the short term. In the long term, a string of annual results can provide operational information about the company. It still provides no useful information about whether the stock is an attractive investment at the current price.

YMMV of course.
 
OldShooter said:
Quarterly reporting, "guidance," and analyst estimates are enemies of economic productivity.

Quarterly reporting is inherently "noisy" because the sampling period is so short. People think it means something, which tends to make corporate managment pay attention to it when they could be doing something else instead. Years ago I worked for a sub of Emerson Electric and Chuck Knight at that time was cultivating a reputation for increasing revenue every single quarter. All you had to know about Emerson's quarter you could learn by going down to Shipping. If they were running, shipping everything but their lunch boxes, the quarter was shaping up to be a little slow. If they were sitting around BS-ing, then the shipments were being saved for next quarter. They would even ship orders months ahead of the customer's need, knowing that the shipment would be returned, just to goose the revenue line.

/rant
Click to expand...

When I was a Plant Manager of a very large manufacturing plant, playing games with finished goods (customer orders) and in-process inventory was commonplace. I suspect it's still being done to some extent.
 
pb4uski said:
I think that "guidance" will soon go the way of the dinosaur, and that is a good thing.

When I was in a Fortune 50 in the mid 80s it was much worse... we issued "flash" numbers within a few days of month end... a quick, dirty and preliminary view of the months results... and we were frequently asked to explain differences between "flash" and actual (which followed a number of days later). (all internal.. not external).
Click to expand...
Same thing for me in the 90's with trading and investment banking revenue. If the numbers were worse than the flash, a very detailed explanation was required.
 
I agree that forecasting and guidance should go out, some companies do already. Reporting should stay, especially on actually useful metrics. Annual usually is fine though. You can always report special events separately.

In the same vein, please remove all 'corrected for' earnings metrics in the headlines. Yes, make a good footnote and do explain away, but please don't come back every time with 'non-recurring expenses', pinky-swear!

All of the above is the analyst or prospective investor job. I do appreciate metrics like net capital employed, I'm not so good in calculating those.
 
It’s not mere opinion that we are dealing with here. Public companies are disappearing into the bowels of private equity etc. because of stuff like this. There’s nothing more insidious to a long term owner than to pander to the 20 something Wall Street analyst. I listen to the song and dance at quarterly earnings calls. All that they are looking for is numbers to fill in their spreadsheets. Real life is not captured in spreadsheets! This is a huge distraction to good managers. This is the simple message Buffett is sending. A notable example cited by Buffett is Mark Donegan at Precision Castparts. In addition to any value PCC brought to Berkshire, Mark is now forever freed from all Wall Street dealings. He can focus 100% on PCC.
 
I could do without quarterly reporting, but annual is too infrequent IMO... some countries do half-year and that seems sensible to me.
 
The idea that quarterly guidance should be eliminated is absurd. If you want to borrow money do you have to have forecasts and have quarterly reports compared to the covenants. Does anyone believe any of Warren Buffets companies do not have budgets and monthly comparison and analysis of said budgets? Eliminating corporate guidance means the inside trader will have a much tighter line on company profits.

Warren Buffet has presided over companies that have been some of the worst corporate citizens in the US and gets away with this quarterly guidance crap as if that is the cause of Wells Fargo signing up corporations and individuals for accounts and charging fees they didn’t ask for, he bragged about their ability to expand as he plugged it at every chance he had. Before that he oversaw Salamon brothers cheat and steal in the US Treasury market, his four highest officers knew and did not report it, when asked why Warren’s response was”I don’t know I think someone with a warrant needs to ask, they won’t talk to me” You know hear no evil see no evil, just smile and say aw shucks investing is just sitting on what you own, While he has 4 hedge fund managers managing his money with bonuses for beating the S&P500, only Warren gets away with this cause he looks like a grandpa. Believe me he knows all about the Kelly Criterion it is how Berkshire Hathaway is run.

Look up the Kelly Criterion, it is a method for investing in stocks when you have inside information. It was created based on the solving of the problem when you have inside information that makes a trade more profitable than expected and tells you how much to invest.

Eliminating, or making believe that quarterly guidance doesn’t exist is great for inside traders, no you can no longer prove the inside trading. Index investing has obviously made people so oblivious to how a company is operating financially that the actual information is now viewed as not needed.
 
So are we saying that I'm supposed to put my money in a company and they're not going to tell me how they're doing for a year?

Yes, I was involved in the PITA quarterly reporting end of things but I think shareholders deserve to know what's going on on a regular basis at least from a 30,000 feet view.
 
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aja8888 said:
When I was a Plant Manager of a very large manufacturing plant, playing games with finished goods (customer orders) and in-process inventory was commonplace. I suspect it's still being done to some extent.
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This! Regardless of being a manufacturing or services business, playing games with the numbers to meet EIP objectives is common place and I suspect will continue to be.
 
STOP quarterly or other short term forecasts.

This is the first sentence of the OP.

Nowhere did the OP or Buffett suggest not reporting quarterly or annual numbers. I would happily take daily postings of numbers from the companies that I own so long as it doesn’t cost the company anything incremental to do so.

The slippery slope starts with analysts prodding management to make EOQ predictions. As many posters above have shared their experiences as middle managers in such companies, lots of misguided behavior exists. From inventory to order pull ins to layoffs during the last week of the quarter. In my megacorp it was a routine practice to not cut checks during the last two weeks of the quarter. Guess what some of the suppliers did? They simply didn’t ship us. It lead to lots of activity at the plant level. My megacorp actually had a fiscal calendar different from the regular calendar. 4-4-5 allowed hockey stick numbers. Why? All to play the guidance game with Wall Street. Wink wink nod nod.

Guidance and reporting are entirely different things.
 
Berkshire Hathaway is a major shareholder. Is it safe to assume that it has voted its shares along those same principals Mr. Buffet (and Dimon) espoused in the OpEd?
 
OldShooter said:
That would be true if it meant something. IMO it does not.
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+1

Reminds me of the QM reporting I had to do when at mega-corp. The monthly and quarterly data was reported up, yet I doubt that it was ever reviewed critically. Compliance for compliance's sake, we used to say, regardless of whether or not it was relevant. Oh well, it helped keep me in a j*b.
 
One point to remember: The longer the reporting period, the harder it is to fiddle the books (short of crime) in a material way. It is easy to fiddle things like sales and inventory on a quarterly basis, but the fiddles are limited and are 1/4 as effective in tuning the annual numbers.

I guess the other point is that IMO quarterly numbers are not very important to investors. To traders, OTOH, they are mothers' milk, as are any "guidance" or other preview numbers. Since stock prices are affected by traders on a quartely basis, there is always the chance that a lucky guess based on all these meaningless numbers will produce three cherries on the trading slot machine.
 
Agree.

Hands off investing means long term to work well, which is what Buffett & co does, and my approach too. It's the way of the business owner too.

Speculation needs ad-hoc immediate information, and is much more prone to misinterpretation, massaging, signaling, and insider trading. I have no love for the casino mentality, and I'd argue it is harmful.
 
I am uninterested in the casino players. They are playing a zero sum game (before costs) so it really doesn't affect investors except possibly to increase standard deviation of individual stocks. Most investors will have diversified away individual stock risk, though.

Harmful? Well maybe to the casino players, but the players in real casinos and in real lotteries know that their activity is, statistically speaking, harmful too. Still they play. Once in a while, while in line at a C-store, I will thank a big lottery ticket buyer for helping hold my taxes down but that little hint is the extent of my concern about other people doing themselves harm.
 
Totoro said:
Agree.

Hands off investing means long term to work well, which is what Buffett & co does, and my approach too. It's the way of the business owner too.

Speculation needs ad-hoc immediate information, and is much more prone to misinterpretation, massaging, signaling, and insider trading. I have no love for the casino mentality, and I'd argue it is harmful.
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+1
 
OldShooter said:
One point to remember: The longer the reporting period, the harder it is to fiddle the books (short of crime) in a material way. It is easy to fiddle things like sales and inventory on a quarterly basis, but the fiddles are limited and are 1/4 as effective in tuning the annual numbers.

I guess the other point is that IMO quarterly numbers are not very important to investors. To traders, OTOH, they are mothers' milk, as are any "guidance" or other preview numbers. Since stock prices are affected by traders on a quartely basis, there is always the chance that a lucky guess based on all these meaningless numbers will produce three cherries on the trading slot machine.
Click to expand...

:)+1 Great choice of words. Will use it as I often get into this sort of discussion (Speculation versus investing) within my circle of friends.
 
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