The start of the football season has got me thinking about the language that is routinely used in the financial press. How often do we hear about winners and losers, not referring to football teams, but to share price moves over a single day! Quarterly earnings announcements are often reduced down to beats or misses, with much “investment” commentary talking about the ratio between these two numbers. When journalists talk about league tables, they are just as likely to be talking about which fund has outperformed its peers, as whether Chelsea has held its (rightful?) position at the top of the Premier League.
Does this matter? Is this simply the way that journalists make the complex world of business more accessible to the casual observer? Or is it a cynical way of bringing some excitement into the world of investing, which should arguably really be about the benefits of long term compounding of returns with limited trading activity.
I think the language does matter, for two reasons. First, the stock market is complex and fulfils an important function in the capital allocation process. Investors may be charged with looking after significant assets such as savings or pensions. I don’t think that understanding is enhanced by referring to companies’ financial results as a single score, rather than a broader assessment of operational and financial issues. Active investment involves making detailed appraisals of the strength of business franchises, balance sheets, operational performance, environmental, social and governance issues and other matters. Focusing on a single measure such as a “beat vs expectations” is, at best, unhelpful and, at worst, risks undermining confidence in the important role of the stock market.
Second, and perhaps even more importantly, focusing on earnings beats or misses, and daily winners and losers can encourage short term behaviour by company management. It can lead to poor capital allocation decisions if a management team focus on delivering consistent positive earnings surprises, potentially at the cost of longer term investment that could deliver higher growth or improved financial returns. I am in favour of explaining issues as simply as possible, but I don’t think high frequency, simplistic comments encourage a long term perspective. In this vein. I welcome recent moves in the UK to discourage companies from producing detailed quarterly results, putting more emphasis on interim results and audited annual figures.
Perhaps language should not matter, but unfortunately I think it does. If we reduce stocks and shares to the language of football commentary we may all face a penalty by the end of the season.
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