Recent headlines excitedly announced that earnings season has arrived. This is certainly an exciting time for the financial media! This gives them lots of information to report on; information that is mostly irrelevant to the long-term investor. But that doesn’t matter to the media. They know that with crafty headlines, they can get a lot of investors to care.
Earning Season is Illusory Information
First off, let me categorically state that earnings are very important. Stock prices, in the long run, are driven by a company’s earnings. (In the short run, stock prices are driven by fleeting feelings and faulty perceptions).
How can earnings be so important and yet earning season be illusory information? It is due to the measurement period of the earnings information. Earnings are quarter-by-quarter. Earnings will often be compared with recent quarters and even to the prior year. In other words, its all short-term information. Long-term investors often fall for the temptation and make investment decisions based on short-term outcomes.
Earnings season information is illusory because, while the earnings are important, the short-term earning outcomes are just another kind of noise. If a company beats earnings estimates, what does that mean for the investor holding the stock for the long haul? What if they missed earnings, why should an investor care? Given the reality of economic cycles, wouldn’t such outcomes be par for the course?
Earnings Season Shouldn’t Matter to the Investor
When positive earnings occur, companies continue to execute on those things that drove the positive earnings. When negative earnings occur, companies seek a solution. That may include a tighter budget, layoffs, and/or a pivot in strategy. But the bottom line is that companies have a significant incentive to turn the company around when they hit the inevitable bump in the road.
The long-term investor should not care about a company’s quarterly earnings. But they very well may care! Because the media needs them to care, and they will go to great lengths to get their attention. After all, if investors don’t tune in, the media can’t sell ads.
One of the greatest qualities an investor can develop is discernment. Being able to recognize what is noise and what information is important can greatly improve investors’ decision-making process, and ultimately their results. Just don’t look to the media to tell you what is important and what is not. They are playing a different game.
Related: When ‘Wait and See’ Is The Right Investment Strategy