Buffett’s Warning on the Perils of Short-term Thinking: An Examination of the Negative Effects of Earnings Estimates and Forward-looking Statements

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Investing Pioneer – 4:35 PM EST – 1/27/2023

Short-term thinking can be the root of eventual failure or sub-par performance for any venture. Businesses are no expectations. In the last few years, Buffett has called on companies to stop short-term guidance statements, by virtue of some of the decisions he has seen been made as a result of the pressures.

Though he does not argue against the standard issuance of quarterly financial statements, rather finding it useful, the general culture surrounding it may be a net negative, Buffett believes.

The reason is, to hit potentially arbitrary short-term targets, shortcuts are made that do not bode well for the long-term performance of the company.

Forward guidance may on a short-term interval place a lofty goal. Extrapolating that goal, considering the principle of basic compounding, one quickly finds it balloons to unrealistic long-term prospects.

The natural effect? The short-term targets are not met, and in the process systems for the long term are undeveloped, and systemic problems arise.

“I think it’s an evil practice to be in the game of earnings guidance, and it is a game.” 

-Warren Buffett (CNBC)

Indeed, the general principle surrounding this exists for life in general, not just publicly run companies. Prudence, as Buffett has long professed, should be adhered to.

In contrast, an IMF report concluded, “In general, guidance does not seem to harm a company’s financial management or reporting.”

As Buffett has said, there is marked harm in certain contexts and situations. In general, however, this may not be as significant an issue as some posit.

“I have always wanted to improve what I do, even if it reduces my income in any given year.”

-Charlie Munger

According to the analysis of one individual (here) it is not clear, generally speaking, that there is any evidence suggesting quarterly earnings detract from a company’s long-term performance (Quinto, 2020). Using firm quarter observations and guidance data from 2003 to 2015, it was found guidance providers outperform relative to those that do not provide quarterly guidance, concluding that broadly, quarterly earnings guidance does not lead to “managerial myopia” (Quinto, 2020)

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