As a university student I had the opportunity to attend a Michael Kors show during fashion week in New York City. Celebrities lined the front row as beautiful models strutted down the catwalk in outfits that it would be hard to imagine anyone ever wearing.

I relayed my disbelieve that these outfits would ever be mass produced and widely worn to my Aunt who was in the fashion industry. And surprisingly she agreed with me. She explained that in most cases the outrageous outfits represented small and subtle shifts in fashion that were only truly perceptible to industry insiders. The importance of these shifts would be explained by these gatekeepers to the masses. Meanwhile a PR driven hype machine would work to attach a sense of glamour to the brands to sell more purses to everyday people.

This seemingly random recollection of my brush with glamour came to mind as I started thinking about reporting season. As the calendar ticks over to August we start the twice annual investing fashion show known as reporting season.

Investing in shares is taking an ownership stake in a company. As investors we want the companies we own to prosper as that will ultimately lead to the returns we are seeking to achieve our goals.

Yet this foundational truth can get lost in the shuffle as the market gyrates in response to macroeconomic news, central bank policy and the speculative whims of traders.

Reporting season is when the proverbial rubber meets the road and we find out how the companies we own have performed over the last six months. But it can also be a time of confusion for investors.

When I first started investing, I would eagerly await the results from a company in my portfolio and try and quickly digest the PR massaged earnings release.

More times than not my initial interpretation of the earnings would differ from the market’s interpretation. I was surprised when what I perceived as a negative result caused a stock to soar and dismayed when a seemingly strong result caused a drop.

As I developed more investing experience, I started to understand that the absolute performance of a company didn’t really matter.

The true driver of short-term price movements was how company performed compared to the expectations of investors.

As a more experienced investor I have approached reporting season with more nonchalance. I’ve come to appreciate that there are two core truths for a long-term investor.

1. The future is the only thing that matters when we invest

An earnings report represents the past and is simply another data point that we can use to try and figure out what will happen in an unknowable future.

2. Share prices don’t often reflect an asset’s true value

The price of an individual company represents the consensus view of the future at a specific point of time. That consensus view is often wrong. Benjamin Graham personified this in his allegorical Mr. Market which described how a bipolar market swings between periods of optimism and pessimism about the future.

Is reporting season important to long-term investors?

Not really. Reporting season is very important to traders who are trying to profit from short-term market movements.

Correctly guessing the market reaction to an earnings release is an opportunity to make money. Getting it wrong means losses.

But at Morningstar we are investors and believe in taking a long-term perspective. That long-term perspective diminishes the importance of a single additional data point.
If you’ve held CSL for the last 10 years does the result reported in February of 2014 matter? Of course not. 10 years from now the February 2023 report will matter little as well.

As investors have become more short-term focused many companies have responded by managing the results they report. A one-day difference in a capital expenditure matters little over the long-term. It can matter significantly to an earnings release if the delay takes it from December 31st to January 1st. An already poor six months that is bound to disappoint investors is a good opportunity to front load expenditures that would normally be spent in a future reporting period.

What is the value of reporting season

There is some value in this twice-yearly exercise.

It is an opportunity to re-interrogate your investment thesis with another data point. That thesis can be company specific, or it can be a long-term macro view on the economic environment that will reward certain sectors and punish others.

Perhaps you have the same view as the Future Fund and believe that the era of the disconnect between low interest rates and inflation is over and we will see higher levels of both in the future.

If the Future Fund is correct this could mean an end to a golden age for investors. Since the early 2000s we’ve seen margins expand as globalisation allowed companies to cut the cost of producing goods and services. Funding has been cheap and plentiful due to low interest rates. Consumers have taken on massive amounts of debt to keep spending. Governments have taken on massive amounts of debt to cut corporate and income taxes. Looking at results in aggregate could offer a clue if we are at an inflection point. Reporting season may be another indication that margins are eroding under the weight of higher interest expenses and a pull back from globalisation.

The Future Fund’s vision of a new era will have an impact on all companies but favours sectors and companies that can pass along increased costs by way of price increases. That includes infrastructure investments where there are contractual safeguards that automatically increase prices by inflation.

Other beneficiaries are companies that have sustainable competitive advantages that play out in natural pricing power where costs are passed on and market share is maintained . If you believe a company you own has a cost advantage moat then check those assumptions against competitors during this time of inflation. Are they still able to produce goods and services cheaper? If you believe a company benefits from high switching costs than examineif their customers are sticking with them even as they raise prices.

Another good opportunity during reporting season is to check in on a company that is undergoing a transformation.

Reporting season could uncover buying opportunities

The earlier reference to the bipolar nature of the market was not an exaggeration. The market often swings wildly between an optimistic and pessimistic view of the future.
Earnings releases that are perceived as bad news can create buying opportunities as investors stampede away from a company based on a poor six months.

As long-term investors this can be an entry point into a great company even if the short-term looks rocky and patience is required for the pessimistic narrative to pass.

As long-term investors we should care little about short-term volatility except when it is an opportunity to find a great company that is temporarily beaten down.

Our analysts will be hard at work over the next month to provide a long-term perspective to short-term results. This view often contrasts with the breathless headlines we see throughout the media.

I would encourage investors to keep the focus on the long-term and zero-in on what will truly matter as you work towards achieve your financial goals.