The Illusion of Transparency in 21st Century Equities

Warren Buffett solidly trounced the S&P 500 for the first 35 years of his career, and then something terrible happened to him. While in the past, he was able to receive stock tips ahead of time, in 2000 the US government began to require uniform disclosure patterns for earnings information. Buffet had been merely arbitraging information accessible to him in the past, yet now his advantage diminished so greatly that some have claimed he even underperformed the S&P since 2000. While more stringent disclosure rules may have shown that Buffett’s advantage was not primarily due to his stock-picking ability, they were intended to put all investors on the same playing field. Over the last 26 years, the ramifications of that policy have become clear as quarterly earnings reports have become the norm. While gathering reports and enforcing compliance on such a frequent basis is costly, a few greater issues have meant that the envisioned future of free flow of information in fair financial markets has not come to pass. Quarterly earnings provide an incentive for all but the most disciplined executives to prioritize short term returns over long-term viability. They also create a false sense of informational parity, even while those who are better connected(sans Buffett) are still able to consistently beat the market. This attempt at reducing informational arbitrage finally has an extremely negative side effect of homogenizing business risk patterns and putting costs onto the American people.

Trump has even considered reducing quarterly earnings report requirements as it is evident to anyone with an inkling of business knowledge that they make it difficult to focus on future development and growth when the public is allowed an intimate view into your company every three months. One bad quarter of earnings can get a CEO fired who was restructuring the company beneficially. Development costs money, and sometimes even companies later in their life cycles need to burn cash before they earn. Even for those who believe in the theoretical necessity of transparency for investors, the three month window should be recognized by all as extremely short when considering the amount of time it takes businesses to develop. Letting some investors get in on the action a little bit earlier than others is a small price to pay for an orientation of businesses towards more long-term sustainability. Business cycles would be weathered with far less drama as quarterly earnings reports often drive short term overcompensation in either direction. No great business has ever been built in the span of three months, and the choices that determine success do not happen in such a short timeframe either. The quarterly earnings cycle adds information about temporary shifts, but little information of substance about the companies’ strength or trajectory.…