Over the coming weeks, most ASX-listed companies will be issuing their full year results. As usual, investors can expect to see plenty of surprises — good and bad — and some fairly reactive market moves. So, what’s the best way to approach things and ensure you make the right move?
The first thing to note is that if you don’t have any expectations of your own, you appraisal of a company’s results will almost entirely be driven by the market’s immediate reaction. Shares go up — results were good. Shares go down — results were bad.
This first-level evaluation is, to say the least, seriously flawed. Moreover, it will lead to some very poor decision making.
The market’s reaction usually says more about expectations than the results themselves. Often, shares rise on the back of falling profits because the decline wasn’t as bad as investors were expecting. Similarly, shares can fall in response to excellent results if the market was hoping for numbers that were even stronger.
Further, as anyone who has ever run a business will tell you, the results of one particular period will tell you very little in isolation. One swallow does not a summer make, as they say.
Context matters. A lot.
Experienced investors evaluate results in relation to the nature of the business and industry, its stage of development, the broader economic backdrop and longer term strategic considerations.
Results need also be put in the context of your particular investment style. Did you really buy shares in a company because you were making a bet on how the market would react to one particular set of results? Or, more sensibly, did you instead become a shareholder because you believed in the long-term potential of the business?
If it’s the latter (and it really should be for most), how do the latest result strengthen your longer-term conviction in the underlying business? CEOs can deliver cracking results at the expense of longer term profitability, say by ignoring much needed investment and slashing necessary expenses. Likewise, visionary leadership often requires making decisions that have a short-term costs, but can lead to big long-term benefits.
Which brings us back to expectations. Not the market’s — your own.
That’s not to say we should all be trying to accurately forecast results for reach period. That’s notoriously hard, as evidenced by the fact that even those running these businesses usually fail to deliver accurate guidance.
But you should very much have an expectation for a general level of growth. Without it, how can you possible know whether shares are cheap or expensive? Moreover, what’s the narrative to support such expectations? If sustained double digit growth is what your hoping for, how is the business going to deliver this?
If you can’t articulate your investment thesis in a clear and objective manner, and in a way that is supported by sensible reasoning, you have no business in being a stock picker. Yes, that requires a lot of work, but so too does any worthwhile enterprise.
For those that are prepared to put in the effort, the results can be life changing. Not in a “get rich quick” way, but in a long-term, compounding wealth creation kind of way.
That’s exactly why here at Strawman, we encourage our members to support their recommendations with insights and valuations, and then subject them to peer-review from the community. We firmly believe that the best way to improve an investment idea is to challenge it. Either it’s right or wrong, and although the market can deny reality for a time, the truth will always out — so better you stress test your thinking before you even think about buying.
So, don’t walk blindly int this reporting season with only hope to guide you. As a shareholder you are an owner of the business — possibly only a very small part-owner, but an owner nonetheless. But you should act as though you own the whole damn thing, as it is that mindset that best positions you for future success.
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