Conference Calls are a Web of Lies
- Joshua M Brown
- February 11th, 2013
Dedicated analysts on the sell-side or at buy-side firms with heavy stockpicking activities find themselves spending dozens of hours ever quarter listening to earnings conference calls. And on those calls, executives repeat public information that has already been stated in the press release and sometimes offer color commentary surrounding the numbers themselves.
They take mind-numbingly meaningless questions from big firm analysts about Day Sales Outstanding figures or other such pieces of trivium that have absolutely no bearing on the stock's future performance whatsoever. In most cases, the analysts are asking these questions as a form of marketing for their firms' trading desks. The firm's clients, institutions that buy and sell the stock, are also on the call and the analyst's question is like a commercial.
Also, in most cases the executives are making predictions about their own future (it's been proven that they are as bad at this as everyone else is) and putting a rosy shine on either their results or their current efforts to satisfy shareholders that all is well. Nothing wrong with this, it is their job.
What is wrong with this is when we delude ourselves into taking what we hear on the call at face value. Most of the time, we are being jerked off. It took me quite some time to learn this lesson, hopefully the below cuts that time down for you...
From the Wall Street Journal:
In a recent paper, Paul Brockman and McKay Price of Lehigh University and Xu Li of the University of Hong Kong parsed transcripts of company earnings calls, counting up positive and negative words in an effort to determine the overall tone of executives on a call.
They found that executives who used positive words, like "enjoy" or "pleased," were more likely to turn around and sell their own company's stock over the next 30, 60 and 90 days.
On the other hand, executives who used negative words, like "fail" or "unfavorable," were more likely to buy their own company's stock.
The effect was especially strong in companies with small market capitalization and when the chief executive did the talking.
"It's important to pay attention to all these signals that you're receiving as an investor." Prof. Price says. "You should focus on the numbers. It's also important to pay attention to the soft signals" conveyed on a call, he adds.
But when we own these stocks, we need listen regardless. Just in case
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.