Inside Financial Services

No Whining About FD

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In today’s Wall Street Journal, John Levin wants to tweak Reg FD:

Many stocks are down 10% or 20% from their recent highs. Yet when one calls the company they say they are in the “quiet period” and “cannot comment.” They will neither confirm nor modify their existing guidance . . .  And companies are being advised by their lawyers not to answer questions lest they violate Reg FD.

A simple rule change based either on specific company or general market dislocation criteria could be desirable. For stocks in the S&P 500 and the largest in the Russell 2000, if the shares are down 10% from any point reached since the last earnings call, Reg FD could be suspended by the management; a 15% decline would automatically suspend the rule for that company.  [Emph. added]

Ugh. Levin is displaying here the kind of myopic short-termism that gives Wall Street a bad name. I have a couple of pieces of advice for him. First, stop—stop!—with this slavish devotion you seem to have to company earnings guidance. To begin with, often those people don’t know nearly as much as you think they do. They’re only human. Besides, in analyzing a company and judging the value of its stock, you have a lot more sources of information at your disposal than any near-term chatter being put out by its IR department. If the rest of your work is solid enough, any near-term guidance you get will be of secondary value. Plenty of great companies whose stocks produced huge long-term gains have missed a quarter or two. It’s how business—and life—works.

Secondly, get over this fixation with near-term stock-price volatility. It happens, has always happened, and will always happen. If you don’t like it, change lines of work. One of the profound truths of the stock market is that daily price movements almost always turn out to be noise. So rather than look for a (probably bogus) rationale for the noise, when a stock you own is down, go back and recheck your fundamental work to the extent you can and, if that work still holds together, buy more of the stock. It’s cheaper than it was yesterday—and buying cheap stocks is your job.

This isn’t that hard. And, please, no changes to FD.

What do you think? Let me know!

One Response to “No Whining About FD”

  1. bankCFO

    I agree 100% – I had the same reaction when I read the article. There are many companies out there who don’t give earnings guidance – for the very reason that to do so encourages investors to focus on the short term rather than the long term. We have never given earnings guidance or provided estimates, and most investors understand and appreciate our reasoning. If they don’t, then their investment objectives probably don’t fit very well with our management’s focus on long term value creation, so it probably is not a good investor-to-company match anyway.

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