songs my portfolio manager taught me (part 4)

busy friday, much to do

I find myself overdue on several unrelated deadlines, so instead of all the stuff that I had hoped to do, here’s another revisit to the “stock market proverbs with wider relevance” memory bank, this time with two related tunes …

Tell me your reporting frequency, I’ll tell you your investment horizon.  We used to have “prop traders”, when that was a thing – just a sort of internal hedge fund that used to trade the bank’s capital to make a profit from it.  I still think that it was a huge mistake for the regulators to completely ban this practice, seemingly out of an aesthetic distaste for what looked like gambling.  Plus, I suspect, an ingrained belief in efficient markets which tended them to think that anyone who was systematically making money had to be cheating or taking excessive risks.

Some of them were bloody good at it, but there were also quite a few “characters”, and at one particular firm I used to regularly get into arguments with a couple of them.  During one such conversation, a particularly hard-charging German guy said that he “didn’t care about” something I was telling him, because “I am a long term investor”.  I demurred, saying something like “don’t you have to close your book every single day?” and he kind of blew up.  I had touched a nerve, because this guy was indeed allowed to hold overnight positions and was very proud of the fact, and was quite pissed off that I’d mistaken him for one of the ordinary traders.

So anyway, he subjected me to a quite extended rant, of which one particular passage sticks in my mind (and has presumably been rewritten over the years by the polishing effect of memory).  “I can hold a stock for five years if I want!”, he told me. “As long as the daily P&L is OK, I can hold it for as long as I like”. 

The most misleading number in a set of accounts.  We all know, accounting numbers need to be read sceptically. They are often fudged, distorted and misreported, and even in the best case, they are a low-resolution scan of the underlying business reality.  But it’s quite something to consider that for fiscal FY 2023, every single set of company accounts published misleading numbers – and they are the same numbers, and they are given extremely high prominence in the reporting.  What numbers am I talking about?

The numbers in question are the numbers “2023” and “2022”, on the top line above all the other numbers.  They’re misleading because they are telling you, by implication, that twelve months is the relevant time period over which to assess the performance of the company and its decision making.  This is almost never true.  Even more so with quarterly accounts.  The most dangerous numbers in the whole book are on the top line.

yes, I know some companies don’t have December year-ends.  now stop bothering me will you, I have work to do.