Warren Buffett is a fantastic long-term investor. When it comes to his stock investments, he’s famous for saying, “Our favorite holding period is forever.” A huge proportion of Buffett’s fortune comes, directly or indirectly, from his insurance operations, especially property and casualty insurance, which can suffer multibillion-dollar losses in the event of major hurricanes, hailstorms, and the like. It’s a prime example of a business that cannot be judged by quarterly earnings. And so it comes as no surprise to read Buffett extolling “practices that encourage long-term thinking and investment” in the Wall Street Journal, and decrying people and companies that focus on quarterly earnings.
Buffett’s op-ed, which he co-wrote with JPMorgan Chase CEO Jamie Dimon, is exactly the sort of thing that is designed to get people to nod their heads and feel that they’re drinking deeply from the Sage of Omaha’s bottomless fount of wisdom. But the more carefully you read the piece, the harder it becomes to find any real substance to it. Meaning slowly vanishes away, like the Cheshire cat, until all that’s left is the vestige of his avuncular smile.
Buffett and Dimon wrote the op-ed as the frontmen for Business Roundtable, “an association of nearly 200 chief executive officers from major U.S. companies,” whose slogan (I’m not making this up) is “More than leaders. Leadership.” As Matt Levine points out, the two billionaire CEOs must have been carefully chosen to byline this thing: Over the course of decades, both of them have proven themselves to be very good at creating long-term shareholder value. If either man were to set up a private company tomorrow dedicated to “an undertaking of great advantage, but nobody to know what it is,” they could surely raise billions of dollars for it. If almost any of the other 198 CEOs tried the same stunt, they’d get laughed out of the room.
Investors concentrate on the short term because they require a certain degree of accountability, and as such it’s inherently suspicious that Business Roundtable rolled out the two members who have managed to free themselves most successfully from those otherwise-inescapable accountability constraints. The not-so-subtle message from Buffett and Dimon is that investors should treat all CEOs like they treat Buffett and Dimon. Which is silly, because of course they shouldn’t.
The other weird thing about the op-ed is that the authors don’t seem to have a problem with quarterly earnings reports at all. “Transparency about financial and operating results is an essential aspect of U.S. public markets, and we support being open with shareholders about actual financial and operational metrics,” they write. Instead, the subject of their column is something much narrower: not earnings reports, but rather earnings estimates. (The subhead of the piece is actually “Public companies should reduce or eliminate the practice of estimating quarterly earnings.”)
Why are earnings estimates bad while earnings reports are good? Weirdly, Buffett and Dimon fail to address this rather obvious question. “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,” they write. But the reason why companies have an unhealthy focus on short-term profits is that they fear that their stock price will fall if they release a single bad quarterly earnings report. And the reason that they put out quarterly earnings estimates is precisely so that they can manage the market’s expectations, and thereby make it less likely that they’ll be punished on earnings day.
In other words, earnings estimates are a consequence of the market’s short-termism, not its cause. And if you got rid of them, the market would be just as short-termist as it is now. This proposal, then, isn’t an attempt to get rid of short-termism; it’s an attempt to get rid of a mechanism by which less-trusted companies try to earn the trust of the markets. (Only about one-third of companies put out earnings estimates, and it’s not the successful and mature third.) Rich people don’t need to build their credit; poor people do. This is much the same. Don’t ask billionaires whether these mechanisms are needed, because these mechanisms aren’t designed for billionaires. Dimon and Buffett don’t necessarily have malign intent here: I don’t think they’re deliberately trying to remove a mechanism that smaller companies use to become trusted. But that’s the effect of their proposal.
There’s also a decided whiff of hypocrisy here. If you want to know how Buffett really feels about the market punishing companies for reporting unexpected earnings, don’t look at carefully workshopped pablum from Business Roundtable. Instead, look at his latest shareholder letter.
Buffett’s WSJ op-ed opposing earnings estimates is a broadside against attempts to dampen down stock-market volatility. The only possible conclusion from it is that he would like to see stock-market volatility go up around the time of earnings reports. That’s a perfectly legitimate position to hold; many people believe that individual stocks aren’t volatile enough, given how risky they are. And if you’re really holding for the long term, then short-term volatility, once a quarter, really shouldn’t bother you.
And yet, when writing to shareholders, Buffett complains bitterly about new rules that will make Berkshire Hathaway’s earnings more volatile. “Televised commentary on earnings releases is often instantaneous with their receipt, and newspaper headlines almost always focus on the year-over-year change in GAAP net income,” he writes. “Consequently, media reports sometimes highlight figures that unnecessarily frighten or encourage many readers or viewers.”
Why is this bad? Only because it causes the exact same volatility that Buffett ostensibly is perfectly happy with, if he’s arguing to do away with the estimates that are carefully calibrated to keep stock trajectories on a steady upward path. If scared short-term investors dump a stock within seconds of an earnings release, and that stock is picked up at a discount by long-term investors buying the dip, you’d think that Buffett would be happy. But earnings volatility, even if it’s fine for everybody else, is seemingly bad for Berkshire Hathaway.
There’s nothing particularly great about earnings estimates. Most companies don’t do them, which is exactly how it should be. But let’s please have fewer lectures on the subject from those who don’t need them. Especially when even those people have legitimate worries about how the market will react to official quarterly reports.