Tuesday, February 9, 2016
Wall Street Short-Termism – Companies and Their Guidance are Not to Blame
While we applaud Larry Fink and other Wall Street leaders’ speaking out on the dangers of investment short-termism in Wall Street, we are not convinced that the corporate profit guidance practices he critiques are the cause of short-term thinking in Wall Street, and we find no small amount of irony in Wall Street pointing the finger. We do share his concern about a dearth of longer-term thinking and capital allocation in Corporate America, as that does seem critical to long-term growth and success.
Stocks are valued principally based on the expected future financial performance of the underlying company, and management guidance – profit or otherwise – is an attempt to help investors understand where the company thinks it is going, and who should know better than the Company itself? Absent any corporate guidance on where the financial chips are expected to fall, Wall Street is more than happy to pick up the slack and provide its own estimates. Headlines and post reporting trading activity tend to focus on results vs. expectations codified in consensus estimates and the calls go out to react to this short-term measure of progress.
In this dynamic, Mr. Fink’s suggestion to reduce or eliminate the data-points and perspective provided by a company on where it is going and how this should impact financial performance along the way, does not appear to provide any benefit to anyone. In fact, the less guidance companies provide, the more likely the Wall Street perceptions can become off kilter. This path can only reduce investor confidence in the visibility of future financial performance, a dynamic that should similarly reduce the company’s valuation, providing an unsupportive feedback loop for Mr. Fink’s suggestion.
The real problem is not profit guidance but the behavior and business model of Wall Street wherein the highest margin revenue streams (commissions/loads) do not come from patient buy-and-hold methodologies – in fact buy and hold is not good for Wall Street margins. Short term trading is far more profitable for Wall Street than long-term stock ownership. The whip-sawing of capital in and out of various investments generates commissions on each transaction, and in the case of many funds offered by Mr. Fink’s firm, the sales fees/loads are greater the more frequently funds are moved from one to another.
So it would seem that Wall Street’s business model itself, as well as the structure of asset management fees, performance fees and fund advertising/marketing that focuses on short term performance to attract new funds (and also can lose assets for the same reason), has a far greater role in short termism than does corporate profit guidance.
The nature of Wall Street business today is highly reactive to short term performance and not focused on long term investing at all. We would argue that underlying incentive for activism is also rooted in the pressure for short-term results and is Wall Street’s response to trying to accelerate investment returns. So we would argue that Wall Street has set up the game and the rules that fostered the current markets. It is this ecosystem that must take responsibility for the pressure to deliver short-term performance – as well as the corporate response to dealing with this very apparent set of rules.
That the volatility and short termism in investment views that Mr. Fink seems to critique have grown so rapidly over the past few decades cannot be unrelated to a corresponding decline in average Wall Street commissions. The only way to make up for lower commissions is greater transaction activity and greater transaction activity is in opposition with a longer-term investment views.
The evolving rules of the game provide an underlying motivation for being reactive to short term events and performance – and not taking the long-term view that Mr. Fink exposes. So rather than blaming Corporate guidance and disclosure practices, perhaps Mr. Fink and his cohorts should look inward at how their teams are compensated and how their products are marketed – and whether they have been optimized to support a longer term investment view.
We would hazard a guess that there is much that BlackRock could do to refine its methodologies, business model and communications to focus its teams and customers on long-term results. That effort would foster an environment where Company’s could feel more comfortable to do the same with their strategies and investments.
The securities industry and the financial media could go a long way to helping in this endeavor as well, to wit – one of our clients recently reported very impressive year over year improvements in its business – and yet the Wall Street response was to ignore the 44% revenue improvement year over year – and the $7M positive swing on the bottom line. Instead, the media coverage and trading activity ignored the solid result and instead focused on the Company having missed the revenue estimate and the bottom-line estimate of just one analyst covering the stock. P.S. the company in question provides no profit guidance, is making long-term investments in its business that Mr. Fink would applaud – but the market reaction was the same. Even the media contributed to the short-termism Mr. Fink critiques, with headlines that only discussed our client’s “miss” but not the triumphant turnaround of the underlying business.
So given this orientation toward the precise predictions of near term results – with or without a Company’s help – is the Company to blame for trying to help shape expectations with guidance, a practice intended to mitigate possible perception gaps that lead to “misses” or “surprises” that create damaging investor and business perceptions and negative share price movements in the near term?
Further, who actually takes the reputational hit when a company “misses” expectations set by Wall Street? I know from experience that it is NOT Wall Street – I’ve never seen a headline that stated that analysts “missed” the quarter. For this reason, we believe it is an investor relations imperative that Companies do all they reasonably can to inform investors on their plans, outlook and financial expectations. We view this effort as integral to the investor relations function, as it helps ensure that third party expectations are as in-line with those of management as possible. Explicit earnings guidance is one such means of achieving this goal, but there are other ways of achieving the same thing.
And lest small or microcap companies take Mr. Fink’s advice to heart – their plight is even more severe as their limited visibility, sponsorship and liquidity lead to even greater volatility in their share price around financial results – and greater vulnerability to perception risk. These factors provide a solid real-world rationale for making an investment in better shaping investor expectations around financial performance in the near term – next few quarters as well as the long term.
While we completely agree that focusing on the long term and allocating capital and resources toward long term strategies and goals makes the most sense, as long as Wall Street gets to “vote” on our clients’ success in real time over 23,400 seconds of each trading day, 5 times per week – and as long as the compensation structure for Wall Street is not better linked to the long term orientation that Mr. Fink espouses but instead is better rewarded for the opposite, we find it hard to counsel our clients to buy into his vision.
Instead, we believe companies should do an excellent job of explaining their vision, their goals and plans for the long term, as well as preparing investors for the consequences of those decisions in their near term results. The more helpful detail they provide, the greater comfort and confidence investors will have, and the more likely (not less likely) that investors will be motivated to hang on for the long run too. Though we set out to drive 2,000 miles to a distant city, does that mean that we must ignore the guideposts and gauge readings along the way that help us understand how we are doing in our journey and how well resourced we are to get there?
But kudos to him for at least raising the topic – as we do agree that more and better longer term thinking and capital allocation will lead to better long term investment outcomes, which is good for all but requires more patient investors! But we felt we should defend the corporate practice he critiques while also sounding an alarm for we are concerned his prominence might unduly influence companies – particularly those in the small or microcap realm - to follow his logic and find themselves in a worse position.
David C. Collins
Managing Director, Catalyst Global
New York City
February 9, 2016
Thursday, January 28, 2016
Thursday, October 15, 2015
We’ve provided some screen captures of Goldman, Sachs quarterly results reporting as it appears on TD Ameritrade this a.m. The same analysis can be performed on other financial portals to judge the success and efficacy of the alternative approach.
Clearly the financial community was poised for the report and the news flow was seemingly unimpeded by the change in disclosure methodology which eliminated paid wire service dissemination in favor of a website led disclosure supplemented by Twitter communications.
Note that in order to achieve broad instantaneous disclosure of its financial results outside of its website and Twitter activity, we have been told by reliable sources that Goldman provided its news release in advance to certain financial media, such as (we presume) Dow Jones, Reuters, Bloomberg etc. so that they could prepare the content and report it simultaneously with the web release.
A few cursory observations on how it went (from TD Ameritrade's news sources - example screen grabs provided below):
- In our observation, Goldman’s release appeared on their website at 7:35am ET – possibly 7:34am ET however, Dow Jones' headlines started reporting the results at 7:33am ET.
- From our observations, the Zack’s coverage, while it says 7:06am ET, did not appear prior to the Dow headlines and seems to have been “post dated” in its posting to
- None of the Goldman headlines on TD Ameritrade provide direct links to the full content of the Goldman release – whereas in the Q2 reporting cycle the full text of the release is accessible by clicking on a series of Dow Jones headlines.
- The absence of a broad, simultaneous distribution of the entire news release to financial portals such as TD Ameritrade remains our principal critique of the website-driven disclosure.
- Even the advance notification of certain major financial media such as Dow Jones did not achieve the same level of access to the source content (the actual release) as did Goldman's previous paid wire service distribution.
- Also, anecdotally, the first MarketWatch Clip today was at 7:40am ET vs. 7:37am ET for Q2 reporting.
Again, while we do appreciate the attempt to innovate, we do hold innovation to a standard of efficacy and relevance and for that reason we've gone out of our way to raise caution about this new approach for Companies considering it.
The analogy that comes to mind is that if we needed a document to "absolutely, positively" be somewhere the following morning, we would utilize one of the major overnight courier services, rather than to construct our own distribution channel of fast cars and fast drivers to achieve the same goal. It just does not seem that safety or efficacy were served in this experiment, but we welcome any evidence that in fact this is a far better idea.
The Catalyst Global Team
as Appeared on TD Ameritrade on October 15, 2015
Goldman Sachs Q2 Reporting Headlines From July 16th as appear today on TD Ameritrade (Release issued via a Newswire Service at 7:35 a.m. ET)
Looking at other disclosure sources we find the following issues:
Goldman's Q3 results are not listed in the Press Release section for Goldman on Bloomberg.com - not a terrible issue given that some coverage of the results appears on the website - but not an ideal result for 1/4ly results.
Similarly, on TD Ameritrade when searching on press releases, Goldman's Q3 results are nowhere to be found - again not a desirable outcome.
Goldman's Q3 results are discussed in a news item on Reuters but the full text of the results is not available on Reuters news page for Goldman.
Here's the news item attributed to Zacks but we don't believe was issued until after the release was posted to the website around 7:34 or 7:35 - it's time stamp of 7:06 am therefore appears to be incorrect. While not a major issue, it does raise a question as to the accuracy and reliability of data that gets reported and then consumed by investors.
Thursday, October 8, 2015
While we admire their effort to innovate, Goldman’s decision to not utilize a wire service to disseminate their upcoming earnings but instead to disclose their results via their website and Twitter seems a step backward for full, fair and simultaneous, broad disclosure.
Goldman’s choice of “pull” vs. “push” in material disclosure seems to go against the spirit of Reg. FD – even if the SEC has condoned the practice.
Companies looking to follow Goldman’s lead should consider the following:
- Do investors prefer to go and fetch earnings news off each company’s website - or do they prefer to access all company earnings in real time via their preferred financial portal/data source?
- Isn’t it easier and better to use a wire service to “push” material earnings data to all relevant sites/services used by investors in real time?
- How do Goldman’s financials get onto all the major financial portals and databases relied upon by most investors? When is this accomplished? [Read below]
- What data integrity safeguards exist in getting Goldman earnings content on other investment information portals/services?
- How do you confirm the time disclosure has been achieved and when you are able to “push” your data out via email, etc?
- Is your website secure and sufficiently robust and easily navigable to provide immediate access to all investors in real time?
- Is your web team able to accomplish such disclosure efforts and if so, at what cost relative to the alternative?
- Are you 100% confidant your site cannot be compromised before, during and after your material disclosures? Are you comfortable in taking on any liability related to managing this function?
While industry leaders can get away with making a process more time consuming and less investor friendly – can you? What would the world look like if all companies followed Goldman’s approach and investors had to go to each company’s website to
get material earnings news? It certainly would be good for driving Edgar traffic!
Does a 140 character Tweet have a real place in disclosing material information when the source material is initially available on just one website? What about unplanned material news - which is quite different than normally scheduled earnings reports - does the website/Tweet model provide suitable disclosure breadth & speed?
And in the end, what does Goldman really have to gain from this approach, besides wire service cost savings (offset by the cost of in-house efforts) and publicity for it and its corporate finance client Twitter?
While the incidence of high-profile online security breaches continues to grow and no site seems immune, even the wire services, the problem isn’t wire service disclosure – the problem is security. Our sense is that the wire services are spending a lot more time & money on addressing those risks, than most corporate or IR sites, and their speed and breadth of reach is really not possible to beat.
The concept of moving the source of your disclosure from a wire service that reaches hundreds of mainstream financial websites simultaneously, to your own website, is hard to understand, particularly when you also consider how this action could relocate the risk and potential liability of any disclosure mishaps directly to your company.
Publicity aside, it's very hard to understand how this is a good idea for Goldman, its investors or anyone else?
What we learned this afternoon from speaking with industry colleagues is that to address the disclosure limitations of its website, Goldman plans to provide "advance copies" of its news annoucement to several media sources prior to its formal disclosure, though we were not privy to "how long in advance?" or who those media sources are or are not. This effort seems intended to help these media points digest and report the earnings news while at the same time acknowledging the limitations they would face if they had to pull the news from the website along with everyone else.
While this practice is allowed under the Reg. FD "media carveout," it does seem a counterintuitive security strategy when it spreads disclosure risk across a greater number of points rather than one central location. Fairness, equal access to the news, and sensitivity to investors' needs and the value of their time do not seem as well served with this new model but we'll see how it works over the coming quarters.
David C. Collins
Catalyst Global LLC
October 8, 2015