Better Capitalism; No To Quarterly Earnings Guidance?

   I recently watched a joint interview with Jamie Dimon, the charismatic CEO of JP Morgan Chase, and legendary investor Warren Buffet, where they called for an end to quarterly profit reports. They stress that short-term focus on a company can cause managerial complications that can then trickle down into lower tiers of the structure.

   In their WSJ opinion piece they're quoted with stating “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,” and “The financial markets have become too focused on the short term. Quarterly earnings-per-share guidance is a major driver of this trend and contributes to a shift away from long-term investments.”

   While this may go against the normal rhetoric that is widely observed as short-term capitalistic greed, it is important that this is coming from two industry titans with a clear vision. It goes without being said that quarterly successes and failures do not by any means indicate the long-term performance of a company. This also endangers the flow of readily available capital for companies if investors are not willing to ride out the bumps in the road.

   Let's take Tesla as an example. Tesla is currently the most shorted stock on Wall Street with more than $10.7 billion of their stock or 25% of all their available shares being sold short. While Tesla is arguably overvalued by most modern day valuation metrics, this threatens the long-term vision of the company. Tesla is obviously not a short term-minded company, how could they be with a CEO like Elon Musk

   However, investors and fund managers have obligations to their clients to meet performance targets and this is where things get a bit complicated. You start to wonder whether or not quarterly earnings forecasts help or harm the overall financial market system. On one hand, quarterly earnings reports allow investors to see the ongoing financial well-being of a company, and fund managers can make necessary adjustments for the short term. On the other hand, you have CEOs and other managerial directors in the company stressing about the short-term progress which can cause them to become blind to the future vision of the company.

   If quarterly earnings reports are scrapped then it benefits companies by taking a bit of weight off their shoulders and allows for them to take a longer-term approach and spend all the funds on R&D they need to without having to manipulate their accounting numbers. Buffet has been an advocate of the long-term vision for managers ever since he started investing. One of my favorite quotes of his is "it takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.". 

   Long-term vision can provide value outside of just financial markets as well. Let's take the Sagrada Família for example. The Sagrada Família is a gorgeous Roman Catholic Church that began construction in 1882 and is still not yet finished,  yet thousands of people travel to Barcelona every single day just to see this architectural masterpiece. If the Sagrada Família were to have been built in a much shorter time period then it is indisputable that the one of a kind architecture it possesses would not be manifested into it. The economic value of long-term projects and ideas will always trump those that are more short-sighted.

   Thinking about the future inspires current generations as well as generations yet to come. Take Musk again for an example. Most all of his ventures from Zip2 all the way to Space X all revolve around the idea of creating value for the future. This vision he possesses takes imagination, ambition, and determination to not only explore his ideas, but to bring them into reality. If Musk was short sighted in his ventures, he would probably come off less crazy, but you need thinkers such as himself who are bold enough to stray away from the norms of business boundaries and willing to explore all sorts of different possibilities. No system in any realm is perfect, especially not an economic one. As time changes, so do cultural and societal values. That being said, there will need to be some changes to our economic system to make it sustainable in the long run while still meeting the necessities of today.

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