Have been reading this over the weekend. A lot of the thought process is completely opposite of how we retailers react and read.
A guide to navigating quarterly noise-flow (substack.com)
Pointing out couple of core paras rather than making my points, Below is taken verbatim from the essay.
View each quarter as one more datapoint in a continuing trajectory, not in isolation.
“”Answer starts with making such pictures, so as to internalise inherent lumpiness of long-run trajectories of good businesses. And then incorporate the same into short-run expectations. Use business history, rather than strangers’ estimates, as our guide to analysis of quarterly financials. Realize that that even the act of producing precise quarterly estimates is as arrogant as it is futile. Over the long run, good business invariably do fine, while following a path that is assuredly and extremely volatile. To borrow Pulak’s quote, “Nothing goes up in a straight line”.
Since all trajectories are bumpy, keep wide bands.
Awareness of long-run trajectory makes a compelling case for banning ‘basis points’ as unit of financial analysis. Plus or minus 25% swings in typically tracked metrics (revenue growth, EBITDA margin %) are a feature not a bug. For a company with 15% long-run average margin, a 12% or 18% quarter is normal, not exceptional. Ditto for revenue growth or working capital intensity. Explanations for deviations sound plausible but are actually made-up, usually to fob off pesky questioners on conference calls.
Approach financial results with wide error bands around a general long-term trend. Swings within this band generally merit a shrug of the shoulders, not activation of neurons.
Focus on controllables: relative over absolute performance, balance sheet over P&L.
Companies have little control over the metrics we obsess over – revenue and profit growth – at least over the short run. These are determined by industry growth, stage of business cycle, commodity inflation, exchange rates and base-period. Often, these effects are extreme.
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