Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 169

How good a guide is guidance?

How often have we read or heard that a listed company has missed guidance? Ahead of the upcoming 2016 reporting season, I have been thinking about whether guidance is helpful or not and have been encouraged by recent developments.

Putting aside the persistent presence of selective briefings, ‘inadvertent’ disclosures and other avenues through which company information is disseminated unequally, the idea of dispensing with guidance is one that more companies should consider, and not only when the economic or market outlook is particularly obscure.

Short-term trading is not investing

The shortening of time horizons among professional investors in the United States has been occurring for decades and is a function of the corruption of what investing actually is. Professional investors now destabilise markets, not through buying and selling based on changes of opinion about the outlook for a business or its value, but simply by attempting to anticipate its short-term price movements and reacting more quickly than others.

John Maynard Keynes observed this devolution in 1936:

“Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from 100 photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole ... It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.”

It seems little has changed, and if anything, the situation has become much worse. Sitting in our investment committee meetings I am constantly surprised by the obsession of others with short-term earnings. In the US, a company that misses quarterly guidance or expectations is savaged, as if the change in the rate of growth over the prior 12 weeks signals a permanent end to its fortunes. Conversely, a company that beats its quarterly guidance is heralded as the new growth stock and its shares priced as if the rate experienced over the last 90 days will continue indefinitely.

Little thought, it appears, is paid to the possibility that the company was always going to report the number it ultimately did, and that the guidance might have been set so it could be beaten.

Corruption of strategic visions

Hillary Clinton, in a speech a year ago at New York University, proclaimed, “It’s time to break free of the tyranny of quarterly capitalism.” She’s onto something. Pressure from recently minted analysts, who have never run a business, to have their earnings models and estimates validated by corporate CEOs and CFOs is an obvious case of the tail wagging the dog. It also corrupts a company’s strategic decision-making by prioritising the short-term needs of a bunch of disloyal gamblers over the long-term valuation creation requirements of investor-owners.

Investing has been corrupted by the focus on betting on rising share prices. A company that meets or beats guidance is likely to experience a huge bounce and academic studies showing stocks ‘outperform’ over the three, four or five subsequent days after a ‘positive surprise’ only fuels the fire of the addicts, reinforcing the gambling and speculative behaviour and reducing the stock market to a casino.

Lost along the way has been the understanding that the stock market is a venue through which investors can share in the wealth created by the compounding of profitably reinvested retained profits.

Turning point

It seems, however, that July 2016 might mark a turning point. In a carefully worded open letter, the chiefs of America’s largest corporations and investment managers, including Warren Buffett, Jamie Dimon, Jeff Immelt, Larry Fink and others representing Blackrock, Vanguard, General Motors, T.Rowe Price and State Street Global Advisors, outlined a series of common-sense corporate governance principals such as:

“Our financial markets have become too obsessed with quarterly earnings forecasts. Companies should not feel obligated to provide earnings guidance – and should only do so if they believe that providing such guidance is beneficial to shareholders.”

Expanding on the above summary, the full document recommends:

“Companies should frame their required quarterly reporting in the broader context of their articulated strategy and provide an outlook, as appropriate, for trends and metrics that reflect progress [or not] on long-term goals. Companies should determine whether providing earnings guidance for shareholders does more harm than good. If a company does provide earnings guidance, it should be realistic and avoid inflated projections. Making short-term decisions to beat guidance [or any performance benchmark] is likely to be value destructive in the long run.”

There is little doubt that when a company’s management announces a forecast, and some weeks out it becomes obvious it won’t meet the target, there is a very great temptation to find the difference, perhaps borrowing it from the future or even worse, borrowing it from thin air. Removing temptation is clearly superior.

There can be little doubt that the future of Australia, its employees and investors, depends on the effective management of business and companies for long-term prosperity.

The recent evidence that corporate payout ratios for Australia’s top 200 companies have increased from 55% in 2010 to nearly 80% today (leaving just 20% of earnings retained and reinvested for growth), says a great deal about our nation’s growth prospects as well as the serious need to think beyond next quarter and the analyst community’s desire for short-term earnings certainty.

 

Roger Montgomery is the Founder and Chief Investment Officer at The Montgomery Fund, and author of the bestseller ‘Value.able’. This article is for general educational purposes and does not consider the specific circumstances of any individual.

 

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Economy

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Investing

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Property

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Shares

ASX reporting season: Room for optimism

Despite mixed ASX results, the market has shown surprising resilience. With rate cuts ahead and economic conditions improving, investors should look beyond short-term noise and position for a potential cyclical upswing.

Property

A Bunnings play without the hefty price tag

BWT Trust has moved to bring management in house. Meanwhile, many of the properties it leases to Bunnings have been repriced to materially higher rents. This has removed two of the key 'snags' holding back the stock.

Investment strategies

Replacing bank hybrids with something similar

With APRA phasing out bank hybrids from 2027, investors must reassess these complex instruments. A synthetic hybrid strategy may offer similar returns but with greater control and clearer understanding of risks.

Shares

Nvidia's CEO is selling. Here's why Aussie investors should care

The magnitude of founder Jensen Huang’s selldown may seem small, but the signal is hard to ignore. When the person with the clearest insight into the company’s future starts cashing out, it’s worth asking why.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.