“But what else are we going to use?”
It was a genuine question, in response to my suggestion that ASX CEOs should stop giving “lead.”
It’s even a reasonable question… assuming the guidance is accurate and in the best interest of the shareholders.
But it usually isn’t.
Which makes using it… a bit silly.
But let’s go back a bit.
Warren Buffett – the world’s largest investor and greatest investing educator – recently released his company’s third-quarter results.
In it, I noticed this statement:
To varying degrees, the COVID-19 pandemic has affected our operations. In addition, significant supply chain disruptions and higher costs emerged in 2021 and persisted in 2022. In addition, geopolitical conflicts have developed in 2022, including the Russia-Ukraine conflict. or when our operations normalize. Nor can we reliably predict how these events will change the future consumption patterns of the consumers and businesses we serve.
In other words?
“You don’t know what happens next, and neither do we.”
Which is… refreshing, huh?
It’s also rare.
Luckily, it’s less rare than it used to be: those two “X Factor” events that remind corporate bosses that the future is uncertain.
But many still persist. And many more will return to “guiding” once they hear the coast is clear.
When was the last case?
Maybe January 2020?
How did it end?
Ego is a funny thing.
We all want to believe we know things. Doubly so when someone asks us, because he thinks we could or should know.
Point to the old man Telstra A.D:
Child in the back seat: “Dad, why did they build the Great Wall of China”
Dad, driving: “…To keep the rabbits out…. Lots of rabbits in China”
The ASX version is more like it than we – or the CEOs asked the question – would like to admit, maybe even ourselves.
Let’s say it’s November 2022 (convenient, huh?).
And some stockbroker or fund analyst is on a corporate conference call and wants to know what to expect for the rest of the financial year.
It’s a reasonable question.
A type of.
In fact, it’s not that reasonable, just as trying to answer it is just as unreasonable.
Well, let’s think about it.
There are seven months left until the financial year.
Seven months in which inflation could rise. Or not.
Competitors could thrive. Or die.
Consumers could spend a lot. Or close your wallets.
Central banks could raise rates. Or keep them waiting.
Currencies could go up. Or fall.
Unemployment could remain low. Or increase.
Regulations may change. Or stay the same.
And those are the things that immediately came to my mind.
But do you really expect a CEO to know what’s going to happen next June?
And does the CEO herself also think she might know?
Ladies and gentlemen, take me to the top of the tallest building in the city as the procession slowly makes its way and shout – and please say it with me:
“The emperor has no clothes!”
Now, remember the guy I mentioned at the beginning of this piece?
His statement was in response to my statement that CEOs should stop giving “guide,” because it’s useless.
“But what else are we going to use?” was his reply.
Now think about it a little more.
He was essentially saying “I know it’s probably going to be wrong – or lucky – but at least I can put something in my spreadsheet.”
That analyst – who will remain nameless to protect the guilty and because I really don’t remember his name! He was happy to play the game.
Because he had to fill out a spreadsheet, give that information to his clients and his boss, and then – if and when he got it wrong – use that other useless phrase:
“The company has fallen short of expectations”.
You see, it’s not the analyst’s fault. The expectations weren’t wrong…the company was.
Off the hook.
I hope that – if I’m doing my job right – you can grasp the whole absurdity of the whole dog and pony show.
- The analyst asks a stupid question.
- The CEO gives a stupid answer.
- The analyst reports a stupid answer.
- The company is or is not lucky enough to come close to a silly response.
- The analyst seems smart if he’s right, or blames the company if he’s wrong.
Please tell me I’m not the only one who thinks this is crazy?
But… I need you to pay attention for a little longer… it gets worse.
You see, the CEO doesn’t want the company to ‘fail to meet expectations’
She wants the market to appreciate and respect her. And appreciate the company’s stock.
And so, once given that ‘guide’, he will often make sure it is delivered – come hell or high water.
Which sounds good…until you consider what goes on within a company to accomplish that vanity exercise.
(And lest you think this is hypothetical… I’ve been there many times in the past and seen it firsthand.)
The CEO, who otherwise sees himself as a business builder and long-term value creator, becomes… less so.
Costs are cut, whatever the long-term price.
The sales are made, no matter the implication. Deals are closed, orders are brought forward, discounts are given.
Well, it’s harder to make the next sale when your customer expects the same discounts or is already overstocked on the last deal. Then the despair grows…
(I learned from good authority that at a company I worked for, years ago, orders were invoiced and trucks shipped on the last day of the financial year, only to return to the warehouse the next day for the invoice to be reversed!)
As Charlie Munger says, “Show me the incentive and I’ll show you the result.”
Look, not all analysts are trying to take the easy ride. Most work hard and just want to believe. So they do.
Not all CEOs will deliberately ruin a company’s long-term health just to provide “guidance.”
But, well…enough of them do, many either without thinking about it, or after justifying themselves, convincing themselves that they are acting for noble or honest reasons.
And so, back to Buffett.
Yes, COVID and the war in Ukraine are extraordinary events. But Buffett never gave any indications.
Because, rare among CEOs, he’s honest and humble enough to know (and admit) what he doesn’t know.
If I were a director of a public company, I would strongly encourage my fellow directors and CEOs to abandon the practice of providing “lead.”
Which… may be enough to ensure that I’m never asked to serve on the board of directors of a public company.
Because people prefer to be popular. And to be well thought out, to give the market what it wants.
I don’t blame people for wanting to believe that the future is knowable. It’s much more comfortable than uncertainty.
And self-delusion is a powerful force.
Unfortunately, this is rarely the best way to create long-term value.
Investors should be careful what we wish for.