Warren Buffett is a man who many value investors try to mimic, and when he speaks, people pay close attention to his words. While the term that he invests for – forever – is not suitable for most investors, it’s a reminder that to be successful you have to think long term.
Although it may be tempting to think you can get in, get out, and earn a quick buck, it’s a lot easier said than done. There can be a lot of swings in the market and factors that are outside the control of a company that can influence its share price.
In a recent interview, Buffett focused his attention on quarterly earnings and the importance that investors and analysts place on meeting expectations, which he doesn’t agree with. Buffett stated that, “When companies get where they're sort of living by so-called making the numbers, they do a lot of things that really are counter to the long-term interests of the business.”
Buffett is alluding to the earnings management that can go on in a company as a way for management to ensure their results are strong and so that the share price doesn’t drop. After all, unhappy investors could call for a change in management.
The danger with that is that management could focus on repurchasing shares when it doesn’t make sense to do so for the purpose of driving up earnings per share and other metrics. Even though the company may not have done so well, buying back shares is an easy way to boost per-share performance.
This is just one example, and there are many others of how earnings can be impacted by manipulation. It’s a good reminder for investors to look deep inside a company rather than just look at the top and bottom lines, as the most important details usually lay somewhere in-between.
