Coca-Cola, Motorola, and Google have done it. Should other companies follow suit and ditch issuing quarterly earnings forecasts? I have been mulling over this topic over the past week. What do you think?
In Janet Lowe’s, ‘Value Investing Made Easy’, Warren Buffett is quoted:
I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections, but we care very much about, and look very deeply, at track records. If a company has a lousy track record, but a very bright future, we will pass on the opportunity.
- Pro: Companies use quarterly earnings guidance announcements to explain trends that might affect their financial performance. Companies that ditch quarterly forecasts may be accused of concealing impediments and not portraying a realistic picture of financial prospects.
- Con: The pronouncement of quarterly guidance by companies, projections, and opinions of equity analysts and the fervent anticipation of quarterly earnings plainly increases share price volatility. Equity analysts are blindsided to value stocks on short-term prospects and overlook long-term competitive advantages.
- Con: Corporate managements are compelled to resolve to short-term strategies to make the numbers in their own quarterly guidance. Longer-term vision takes a backseat to short-term performance. Investing is about long-term performance of the companies and investors would rather prefer corporate managements focus on preparing their companies to respond to opportunities and challenges in their respective marketplaces in the five-to-ten year timeframe.
- Con: In general, I have always been a skeptic of the virtues of methods used for financial forecasting. Business forecasting is like predicting your hit rate before throwing darts. The biases in judgments are extensive and suppositions are merely speculative. Too many variables in action are not easily explainable by managements or financial analysts. The vaguer some of these variables are accounted for, the more hazy the projections.