It’s hard to believe, but we’re already back in the thick of another earnings season – that wonderful time of year when companies report their quarterly results.
For investors, earnings season can be an exciting and overwhelming time all at once. Depending on how companies perform – and, often more importantly, what they guide they’ll do going forward – the markets can either be overjoyed or disappointed.
Earnings season feels important. It gives opportunities for analysts like me to appear on networks like BNN Bloomberg and CNBC to talk about the quarterly results from prominent businesses like Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Walt Disney, and other large companies capturing the headlines. Here’s proof:
All of this scrutiny on quarterly earnings often results in significant volatility – in both directions, depending on the mood of the day.
But in the grand scheme of things, does this volatility and attention surrounding earnings season really matter?
If you’re a day trader – trading in and out of stocks on a regular basis – perhaps there’s a case to be made that earnings season is meaningful. However, traders are likely more interested in what the stock will do, rather than learning about the actual results of the underlying business behind the stock.
The Fool’s Style
At The Motley Fool, we practice business-focused investing. When we recommend or buy a stock, we typically have a minimum holding period of three years. Our co-founder and CEO Tom Gardner always holds a stock for at least five years – no exceptions.
When you have a long-term and business-focused approach to investing, the hubbub around earnings season starts to look a lot less meaningful and a lot more like noise.
At the Fool, our primary focus is finding great businesses, buying shares of those businesses, and tenaciously holding those shares over the long run. The better businesses you own – and the longer your time horizon to hold those shares – the less important quarterly results become.
Think about it: Does anyone today really care about what Facebook’s results were in the second quarter of 2013? What about Coca-Cola’s first quarter results in 1985? What about Shopify’s results two years ago?
You get the idea. Quarterly results become noise when you plan on holding a stock for the next five years and beyond. With this perspective, it almost becomes laughable how much time and attention is spent dissecting quarterly earnings to the very last detail.
Focus on what matters
Now, this isn’t to say that quarterly reports are meaningless. But I’d be willing to bet that, over time, your investing results will improve if you:
1) Double or triple your average holding period.
2) Review your stocks once or twice a year rather than quarterly (or even more frequently).
3) When in doubt, sit on your hands and do nothing.
In the U.S., for instance, there has never been a 20-year period where the S&P 500 Index has ever lost money (even after factoring in inflation). Turns out that extending your time horizon and sitting on your hands is a darn effective investing strategy.
I’d also be willing to bet that hyper-focusing on quarterly earnings reports is unlikely to make you a better investor. If anything, obsessing about quarterly results arguably raises the odds that someone will make emotional decisions with their investments based on short-term results. (Perhaps “doubling down” on a stock because it dropped a little bit after earnings, or selling out of a stock because you’ve grown impatient with it not doing much after a few months.)
As investing legend Peter Lynch, former manager of Fidelity’s Magellan fund, said: “Everyone has the brain power to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether.”
Earnings season is a time of year when investors will often be happy when their stocks pop after earnings, and disappointed – sometimes panicked – if a stock drops after reporting quarterly results that don’t please Wall Street or Bay Street.
Earnings season, in other words, can easily lure investors to pay attention to short-term results and price movements, when what really matters is the long-term performance of the underlying business.
Shares of Netflix (NASDAQ:NFLX) are up nearly 8,000% over the past decade, but the stock has seen its fair share of 15% (or more) price drops in a single day. Great companies turn into wonderful long-term performers despite down days and volatility, not by somehow avoiding them.
Volatility is just part of the game of investing in stocks. But the longer your time horizon – and the more you focus on buying and holding quality businesses – the less influential that volatility becomes in your portfolio.
The Foolish Bottom Line
Quarterly earnings results are a nice time to check in on a company’s progress, but they should be seen for what they are: 90-day snapshots of a company’s financial performance. Helpful, but not a be-all-end-all by any stretch.
The great CEOs of our time aren’t running their businesses to maximize financial results over the next 90 days. They are thinking about the next three years and beyond.
In a public appearance last year, Amazon.com (NASDAQ:AMZN) founder and CEO Jeff Bezos had this to say about quarterly results:
“When somebody … congratulates Amazon on a good quarter … I say thank you. But what I'm thinking to myself is … those quarterly results were actually pretty much fully baked about 3 years ago. Today, I'm working on a quarter that is going to happen in 2020. Not next quarter. Next quarter for all practical purposes is done already and it has probably been done for a couple of years.”
As investors, we should have the same mindset. When we buy a stock, we are becoming a part owner in that business. And an owner is more interested in where a business will be in three years or three decades, not where it will be in three months.
Here at The Motley Fool, it’s proven to be winning strategy over the long-term.
David Kretzmann
Analyst,
Motley Fool Canada
Disclosure: John Mackey, CEO of Whole Foods Market (NASDAQ:WFM), an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Amazon, Apple, Facebook, Netflix, and Walt Disney. David Kretzmann owns shares of Amazon, Apple, Facebook, Netflix, Shopify, and Walt Disney. Tom Gardner owns shares of Facebook, Netflix, and Shopify. The Motley Fool owns shares of and recommends Amazon, Apple, Facebook, Netflix, Shopify, and Walt Disney. The Motley Fool owns shares of SHOPIFY INC and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple.