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Quarterly results: Do they matter? - Views on News from Equitymaster
 
 
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  • Oct 15, 2003

    Quarterly results: Do they matter?

    The quarterly results season has started on a euphoric note, not just in India but also around the globe. In the Indian case, until now, there have been no surprises for the markets, on the negative side that is. Positive surprises are always welcome! However, are the quarterly results that important to the retail investor as it is made out to be? We decided to get our viewers' opinion through a poll. Our question was, "The weightage of quarterly results in your investment decisions is..." and the results can be seen in the chart below.

    Of the total respondents, 49% indicated that they give a 'high' weightage to quarterly results before making their investment decisions while 34% opted for giving 'medium' weightage to the same. The balance 17% of the respondents was of the view that quarterly results did not affect their investment decisions. It seems that these (the last kind) could be the class of investors whose investments are based on a relatively longer-term view, which is not affected by quarterly performances.

    However, do quarterly results deserve a high weightage in an investor's investment decisions?

    The class of investors who advocate the importance of quarterly results would give the argument that these help to judge a company's prospects and whether the company is headed in the right direction. Quarterly results declaration also provides insights into making investment decisions based on the company's performance in a short duration, rather than waiting for the annual results to be declared and then making such a decision. They (such investors) would further provide the defence that quarterly numbers increases transparency of the company and that is one of the reasons why declaration of quarterly results was made mandatory by the stock market regulators for all stock market listed entities. It must be noted that this transition to declaration of quarterly results has been in a gradual manner. From the declaration of annual results under a decade ago, it first graduated to announcement of half-yearly results and then to the current trend.

    However, at the same time, the arguments of the opposition cannot be overlooked who believe that quarterly results declaration should be given no or limited weightage in making one's investment decisions. Their arguments revolve around the fact that quarterly performance targets tend to put unwanted pressure on managements to meet their guidance, if any, rather than concentrating on longer-term goals. It also leads to heightened investor expectations, which is not good for the markets, as healthy stock markets are a factor of strong fundamentals rather than strong expectations. This is because when expectations are not met, the wrath of investors towards the stock price is something, which has been witnessed time and again e.g. the aftermath of Infosys' 4QFY03 results. The biggest loser in this volatility is the retail investor.

    Moreover, quarterly performances tend to inculcate the habit of short-term investment strategies amongst investors, which is surely not what the investment gurus of the world would vouch for. Also, it does not make much sense, especially for long-term investors, as companies with sound fundamentals and viable business models would survive the economic downturns and get back on the path of recovery sooner than later e.g. recovery of Infosys on the bourses post the 4QFY03 results. Investors, who had written off the their investment decision in the company based on its quarterly results, would now be regretting their decision. Moreover, further argument could be that if quarterly performances could increase transparency, then there shouldn't have been issues of the likes of Enron, WorldCom, etc.

    Amongst all of the above arguments, where do we stand?

    We would give a medium-to-low weightage to the announcement of quarterly results, definitely not high. We believe in and have always advocated the philosophy of long-term investing, which is also evident from our buy/sell recommendations (Quantum View) that we come out with (a two-year view), and where we have managed to outperform the Sensex by a wide margin (Our report card). We feel that the trend emerging from quarterly results should be taken as a reference for longer-term investment decisions and one or two quarters of below average performance should not make a difference..

     

     

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