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Short-Termism Is Harming the Economy?
- kjw 8y agoThe related CNBC piece cites a McKinsey study on the actual effect -- "Those in favor of guidance say it improves communications with Wall Street, reduces share price volatility and boosts a stock's value. But McKinsey & Co. found in a 2006 study that quarterly guidance didn't affect valuation multiples and didn't reduce share price volatility. The only significant benefit it observed was an increase in trading volumes, which is good for day traders but not useful for most other people." https://www.cnbc.com/2018/06/06/warren-buffett-and-jamie-dimon-join-forces-to-convince-ceos-to-end-quarterly-profit-forecasts.html https://www.cnbc.com/2018/06/06/warren-buffett-and-jamie-dim...
- lostmsu 8y ago> which is good for day traders So, for common folk? Or do they mean people, who do it professionally?
- adventured 8y agoProfessional day traders. https://en.wikipedia.org/wiki/Pattern_day_trader https://en.wikipedia.org/wiki/Pattern_day_trader And usually when day trader is referred to in the financial industry, what they really mean is a professional trader that moves high volume for one person (you can technically be a pattern day trader at relatively low volume).
- hbosch 8y agoDay traders are people who trade the same equity within the span of a single day, basically, or that’s the definition at a brokerage. If you were to flip an equity a couple times in a single day often enough, you’ll be labeled a “pattern day trader” and you will be legally forced to maintain a minimum balance of $25,000. Someone correct me if I’m wrong.
- rpedela 8y agoIsn't that only if you have a margin account but cash accounts aren't required?
- duxup 8y agoA CEO at a company I worked for decided he wouldn't provide guidance anymore because he felt it was damned if he did or didn't. He noted that at the end of a conference call. Stock dropped like a rock the next morning as if we were sure to close up shop or something the next quarter because we provided no guidance. Even better the following quarters some silly stock people put out notes that we missed the predicted numbers. The numbers, they just made up their own predictions, and put that in the press release where they used to note guidance we used to provide.
- craftyguy 8y agoso.. what happened in the long run?
- JohnJamesRambo 8y agoCompany died, but that CEO showed them.
- duxup 8y agoCompany chugged along like they normally did until being slow to adopt new tech caught up to them. The CEO and his buddy the CFO lined their pockets as you would expect until someone bought the company. But they were solid earners until then as they had put themselves in a good spot and provided outstanding service (well that was me and my buddies). Stock never did much as wall street was entering the phase of demanding short term growth for no apparent reason all the time.
- rockinghigh 8y agoI understand your frustration but you can still miss the consensus from analysts. Analysts are paid to give estimates for future price, earnings, sales and so forth for the next few quarters.
- r00fus 8y agoYeah, the company was not missing "the estimates" - Wall St. "analysts" guessed wrong. I hate how consensus analysis turns out like a dictat from the high priesthood - you must jump this high even though you forecasted something completely different.
- zitterbewegung 8y agoLooks like this is a submarine story. Similar story from 2016 https://www.cnbc.com/2016/07/21/warren-buffett-corporate-guidance-can-lead-to-malpractice-bad-results.html https://www.cnbc.com/2016/07/21/warren-buffett-corporate-gui...
- thinkpad20 8y agoNot a terminology I’m familiar with. What does “submarine story” mean?
- teach 8y ago"One of the most surprising things I discovered during my brief business career was the existence of the PR industry, lurking like a huge, quiet submarine beneath the news. Of the stories you read in traditional media that aren't about politics, crimes, or disasters, more than half probably come from PR firms." http://paulgraham.com/submarine.html http://paulgraham.com/submarine.html I'm not sure I agree with the assessment for this story. What would it be PR for? The stock market? Warren Buffett?
- craftyguy 8y agoThis(1) is the only submarine story I can think of. 1) https://en.wikipedia.org/wiki/Yellow_Submarine_(film) https://en.wikipedia.org/wiki/Yellow_Submarine_(film)
- rockinghigh 8y agoA story that comes up once in a while, like a submarine.
- TeMPOraL 8y agoThis is a good tell that the story might be a submarine, yes, but the origin/meaning of this term is pg's essay, as quoted by 'teach.
- deleted 8y ago[deleted]
- thisisit 8y agoI wonder if these two big guys with lots of analytics power at their fingertips have a vested interest in this. I might be wrong but doing something like this might create information asymmetry where one guy knows better than the other where the next numbers are going to land. The pressure to meet short-term earnings estimates has contributed to the decline in the number of public companies in America over the past two decades. Anyone know paper/article which provides evidence for this? My assumption is that the number of public companies is lesser more due to consolidation is various sectors.
- deleted 8y ago[deleted]
- prewett 8y agoYou must not be familiar with who Buffett is. He is basically the antithesis of a trader with "analytics power at his fingertips" (by which I assume you mean computing power). He prefers to make exactly one trade per company: buy a great company and own it forever, preferably by buying 100% of the company in cash. He is a tireless advocate of stock prices reflecting actual value of the company (and his modus operendi is to know the actual value and buy great companies when they are at a substantial discount to it). He split BERK into BERK.A and BERK.B when the stock price got so high that people were speculating on it and it no longer reflected the intrinsic value. He doesn't say what the intrinsic value of BERK is, but he reports book value every year and has a standing order to buy if it is 1.2X book value or below, which puts a floor on what he thinks the intrinsic value is. He also strongly believes in management thinking long-term instead of short-term, and frequently says so in his shareholder letters. This is entirely consistent with his philosophy. If you want vested interest, his buy-and-hold strategy does best when management considers long-term growth rather than short-term manipulation. However, he thinks it is better for shareholders in general, not just himself. Given that he's giving away all his stock after he dies, which can't be that many years from now, he isn't doing this for monetary gain.
- perl4ever 8y ago"He prefers to make exactly one trade per company: buy a great company and own it forever, preferably by buying 100% of the company in cash." I don't think you've paid attention to what Buffett does to make money in the last decade or two. He targets companies that are or may be desperate, and tries to exchange his endorsement for things like preferred stock and warrants at unbelievably favorable terms. He did this with Goldman Sachs during the financial crisis. He tried to make a deal with Uber recently. He is absolutely nothing like the folksy myth you reference.
- timavr 8y agoI never saw a problem with it. The problem is with maximizing the stock price in the short terms versus in the long term. And it is all up to CEO to communicate his plan and then pressure on earnings will be less.
- DreamSpinner 8y agoWhat I'd rather see is monthly "lightly audited" financials. This would provide a lot of benefits around transparency, reduce the incentive for quarterly and annual "cramming / forward entry" of sales, and provide for more of a "continuous audit" for the various accounting firms - reducing the size of the end-of-year rush (since most audit activity should already have been completed) and making it harder for companies to fudge their figures.
- r00fus 8y agoSounds great - how would you lighten the burden without introducing further complexity? 3x more reports = more burden, right?
- colechristensen 8y agoIndustry standards and standard tools? We have computers for doing lots of hard things now.
- wtvanhest 8y agoYou would need to increase FP&A HC to cover the workload of explaining numbers throughout the org. Closing the books at large companies still takes time and manual effort as well.
- nradov 8y agoClosing the books is an anachronism left over from paper accounting. With modern automated accounting the books can be kept continuously closed.
- r00fus 8y agoDo you work on corporate finance? Because constantly running such reports is not free. Can't just handwave away the nontrivial administrative overhead. Heres a snapshot - monthly financial closes often require forward or reverse accounting so things are properly budgeted and balanced. A trial balance report is easy to run, but then the numbers have to be reviewed & approved and discrepancies resolved.
- mozumder 8y agoWhy isn't financial information a real-time report, updated to the nanosecond? Why are financial reports split into quarters? The fact that we split financial data itself into quarters is what drives this short-termism. You now have an official timeline on performance metrics. Databases can track financial data in real time. Just give real-time information, and let each stock trader use their own measure of financial performance, whether it's hourly tracking for day-traders, or years-long tracking for long-term investments.
- milesskorpen 8y agoBecause it takes real work to reconcile this information, make sure it adds up, and doesn't have errors. Doing that real time would be very very difficult for most businesses. When a company releases their quarterly reports they're certifying that the information contained is accurate (and audited). That would be nearly impossible realtime.
- mozumder 8y agoReports can be arranged so that reconciled & unreconciled transactions are separated into their own timelines. Auditing of transactions can happen daily. It's not an impossible problem.
- TeMPOraL 8y agoIt's not an impossible problem, but probably not solved yet, as there was little reason to solve it. (Also, I wonder if most corps would even want it; real-time doesn't leave much space for fudging numbers and other shenanigans.) Corporations are interesting beasts. They don't always want improvements. For instance, I've heard from people selling "cybersecurity" products to enterprises that customers worry that when a system points out a potential vulnerability and later it gets exploited, they can no longer tell regulators and insurers that they didn't know - so in the cost/benefit calculations, improved security competes against plausible deniability...
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- volgo 8y agoLike the reasoning, but not the idea. 1.) The only time new information really comes out is during quarterly earnings, and that's also when prices are most volatile and jumps the most. If you make it annual, then an entire year has gone by before new information has come out, and the floodgate of 12 months of data will force the price to jump even more. If a company misses an entire year of earning, it's stock is pretty much done for a while. That would seem to make it even more urgent for CEOs to manipulate their prices 2) Frequent releases help level the playing field between big institutional funds and smaller players (as much as they can be leveled). In the absence of public info, the ones with most resources can spend money to get more valuable data - field research, product analysis etc. Ex: Because the data is so valuable, it might be cost effective for a $50 billion fund to hire hundreds of people to literally stand outside a bunch of Chipotle chains all over the country and count how many people eat there. You could spend up to $20m for that data and make a huge trade based on it. 3.) You can already sort of ignore the quarterly earnings. You can tell analysts to shove it and not provide guidance and just release the minimum for SEC mandated quarterly releases without any discussion or call. You can focus on investing long term and ignore the earnings for each quarter. You can also ignore the short term price drop that comes with not providing those information. Then at the end of the year you can do a long call and go in depth. If you do this, you essentially follow the model described in the article without forcing everyone to do the same.
- wtvanhest 8y agoI have worked on Wall Street, and now in FP&A. I agree with their assessment for several reasons: External outlooks rarely provide value to wall street. They are internally time consuming for FP&A. I'm confident that they take time and mindshare away from CEOs that could be spent on improving the company. Further, new CEOs usually have no experience with Wall Street so they must learn on the job which further exacerbates the time and energy required. I hope that this gains traction as it will help all companies become more productive.
- jpwgarrison 8y agoDammit. Of all the articles that need to be paywall restricted. I’m down. I’m sympathetic. But I can only afford to pay for content on a couple of fronts. I wish it was more. But I cannot right now. But if that was the article it looks like from the headline? Give it. Away. For a minute. FFS.
- tomhoward 8y agohttp://archive.is/B211l http://archive.is/B211l
- jpwgarrison 8y agoHonestly thank you personally. But that doesn’t address my comment- I can sneak around it with computer fu but I’d think this is in the realm of what should be free. As in not like beer but bread.
- tomhoward 8y agoIt's a fair enough position, but this discussion happens on every HN discussion of an article with a paywall, yet strangely enough nothing changes! The question of how journalism can be commercially sustainable is a very important one, but it's separate to the topic at hand :)
- cepth 8y agoA more recent study from McKinsey in a similar vein: https://www.mckinsey.com/~/media/McKinsey/Featured%20Insights/Long%20term%20Capitalism/Where%20companies%20with%20a%20long%20term%20view%20outperform%20their%20peers/MGI-Measuring-the-economic-impact-of-short-termism.ashx https://www.mckinsey.com/~/media/McKinsey/Featured%20Insight.... Of interest, on page 2 there is a survey result: "87% of executives and directors feel most pressured to demonstrate strong financial performance within 2 years or less", and "55% of executives and directors at companies without a strong long-term culture say their company would delay a new project to hit quarterly targets even if it sacrificed some value".
- titzer 8y agoSir, it's quite possible this economy is not entire stable. Not entirely stable!? Well, I'm glad you're here to tell us these things. Chewy, take the professor in the back and plug him into the hyperdrive.
- erikb 8y agoI found it's not necessarily short-term thinking. It's selfish thinking, reason being that most team/corp/market wide problems usually have to resolved by everybody, while the seemingly success based gains are consumed by a few.