Citywire printed articles sponsored by:
View the article online at http://citywire.co.uk/wealth-manager/article/a705317
Colin McLean: how companies manipulate our search for silver linings
by Colin McLean on Oct 02, 2013 at 12:06
Company reporting is changing, with new regulations coming in from 30 September.
The aim is for a simpler, clearer and more focused presentation. Investors should also get a strategic report instead of the current business review. But, are these new rules on narrative reporting too little, too late?
Recent reporting from a number of large companies suggests that they are adept at guiding analysts and investors, playing on the human weakness for good news stories. Analysts’ biases to optimism and herding are also evident. So how can investors best prepare themselves?
Analyst optimism has been well researched and documented. Over 25 years, consensus forecasts for S&P 500 earnings have over-estimated in all but two years – those happening just after severe recessions.
The major investment banks have tended to make market forecasts largely based on anchoring to the start of the year position, adding a set percentage.
But what has been less well documented is the herding pattern, where forecasts bunch closely together.
In July, Apple reported its iPhone unit sales for the previous quarter, with the number being well outside the range of all 30 analysts.
This key metric is a subject of detailed analysis, involving channel checks and other supplier analysis, so it was a particularly embarrassing outcome.
Facebook also managed to catch analysts off-guard, gaining over 70% in the two months following its July results, which beat all analysts’ forecasts. These are widely researched companies, yet herding predominates, with suggestions that company guidance encourages this.
News sponsored by: