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Are we paying too much importance to quarterly earnings?
Thu, 12 Feb Pre-Open

The earning season has kickstarted and is in full swing. And while the performance so far has been mixed, the reaction of investors seems to be quite skewed. For markets seem to be disregarding dismal performance, even a slight improvement is being interpreted as a milestone indicating better road ahead. As stocks like Wipro and Nalco have witnessed a surge of more than 7% in a day reacting to positive quarter performance, it is time to question investors' attitude.

Instances like these suggest that stock markets are being irrationally exuberant, not missing any excuse to rise even more. While long term performance depends upon a company's ability to generate cash in the long term and dividends, it is the obsession with interim performance that determines valuations than the fundamentals. And one can hardly blame the retail investors, when even investment managers and analysts are seen to adjust their views every quarter in line with reported quarterly earnings, and overlooking the long term prospects. And while this may suit them since risk of going against common market perception outweighs the reward of being right, retail investors are unlikely to make the most equity investing by following this approach. Further, as we all know,interim earnings , with so much scope of manipulation by the management, can hardly be a parameter to judge company's worth.

With a lot of companies yet to declare results, we will not be surprised to see more of such cases. However, long term investors should understand that a good performance in one quarter is not going to change the fundamentals and hence long term valuations of a company. As such, they would do well to follow a disciplined investing approach and not get distracted by the noise in the markets. And the best to achieve that could be to invest in companies with strong and lasting moats and efficient managements.

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1 Responses to "Are we paying too much importance to quarterly earnings?"

Harit Shah

Feb 12, 2015

While I concur with the general idea of the article, I think we should also realise that eventually, good management, solid business and strong moats have to translate into earnings at the end of the day, both quarterly and annually. Sure, there is too much attention being paid by investors at the moment to quarterly earnings, but we should not lose sight of the fact that the company still has to deliver the numbers, annually and it is the sum of 4 quarters that eventually makes a year, right? So on a quarterly basis also, companies have to deliver.

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