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Clear Thoughts
Earnings Season
Originally Published Friday, April 29, 2005
| When companies release their financial information, the market tends to overreact. How does Clear, as opposed to other investment managers, deal with this issue in order to produce superior results in the long-run? |
Public companies report the bulk of their financial data on a quarterly basis, and most companies report within three weeks of each other, hence the term; earnings season.
When companies report, they issue a press release with all of their financials and then follow up with an investor conference call where they highlight revenues, earnings (please see last week's portfolio review on the laws governing reporting) and many provide updated guidance for the next quarter and the rest of the year.
Spring 2005 has brought us a market of extreme reaction to this quarterly event. We have, this season, grown accustomed to seeing stocks go up or down 12% in one day based on these announcements. Historically, overreaction to reports is normal, but within a range. This spring, it seems that the market focus is more on guidance then actual performance and the reactions we are seeing are frequently much more exaggerated than normal.
Why does this happen?
The answer is that the market is inherently emotional. While some of us are saying; look how rosy everything is, others are saying how bad everything is and many believe that the economy is about to get worse. Nuclear threats, weapons of mass destruction and terrorism are still daily headlines. Will the economy ever be the way it was in the 1990s? Where is the dollar or the price of oil today? What will Alan Greenspan say or Elliot Spitzer do next?
Gross Domestic Product (GDP) growth was reported yesterday. It is one of the main gauges of our country's output, and of course, with the usual disclaimers, many analysts say the measurements themselves are flawed rendering the report useless.
GDP growth for the first quarter was reported at 3.1%, the slowest in two years, compared to the fourth quarter of 3.8%. Economists generally had been expecting an increase of 3.8%. For all the over-reaction of the market, first quarter growth was still close to or above the trend and inflation remained within target. Consumer spending, inventory building and business investment contributed most of the growth and government spending was negligible.
Bring this back to earnings season and many investors are focused on what is currently happening in the market. They want to know what is going up and down at that very moment and how to play it. They frequently look at their fund statements on-line and try to market time their trades. When they have time, they are "all over" the markets, when they don't have time they enjoy "ignorance is bliss" and then later jump back in.
Our view is very different as we are long-term investors. We are not day traders. We ignore hourly swings. We ignore many daily swings too.
Every market day our computers scour over 10,500 US traded companies and ADRs, and apply over 700 custom screens of each company's fundamentals to create our basic short list of stocks. Then our algorithms rank and weight the list and only the top rated stocks make it into each of our portfolios.
This reduces the noise of the moment to moment for our investors. Moreover it reduces daily performance chasing that usually produces long-term underperformance.
Going back to how most people made the list of millionaire households.
"Most of these millionaires are older, experienced investors who are in the stock markets for the long haul and largely ignored the recent ups and downs."
Spring will lead to summer and fall to winter; in every season, our computers are programmed to construct portfolios they compute to be the best suited to long-term benchmark beating performance. We leave the emotion to the journalists, the get rich quick types and cable TV hosts. We focus on getting our investors on "the list of millionaires", or moving them much further up on it.
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