I hope you enjoyed the break from the blog!
Aug 31, we followed James Michener into the South Pacific and found out why Paul Gaugin stayed. It’s the water (Gaugin may have, er, named other things). See here.
In our absence, stocks steamed higher and the model portfolio at EDGE approached 40% YTD returns. And in a tragic turn that we missed on the wide sea, Charlie Kirk was killed. I hope it’s the end of an ill chapter.
And yesterday the SEC said it is considering shifting to semiannual financial reporting. Most of us who’ve written earnings releases and call scripts have somewhere in late or early hours lamented their relentless recurrence. Imagine doing it half as often!
But then there are the voices in our heads. What happens to transparency? Does it diminish my job? What about news flow? How do we give quarterly guidance if we’re not reporting every quarter? Is it a big backward step?
And will it mean more volatility?
NIRI this week visits the SEC for the first time since the Pandemic and will bring the matter up before moving on to Capitol Hill and members of Congress.
Let me share my thoughts. The regulatory apparatus of the market’s form should match its function. It’s rather like 13Fs – named for Section 13 of the Securities Act as amended in 1975 – that are literally 50 years old.
Most of the machines setting prices have horizons of about 400 milliseconds. Active money that has been advancing to the rear (what my dad told me bemusedly that the army called a retreat when he served) for 15 years. Most of the money investing in stocks follows models.
Look no farther than the July fund-flows report from Morningstar. Four of the top five firms for inflows are ETF leaders. They attracted more than $60 billion in the month alone.
At the bottom of the rankings showing outflows, four of five are Active managers that saw over $20 billion depart – advance to the rear – in July.
The point? The money motivated by quarterly earnings either bets directionally or has endured as a constituency relentless outflows. Maybe the hedge funds will protest. But so much is already known. I saw an AI CEO yesterday on CNBC say that “LLMs have consumed all the data in the public domain.” And a lot of it that’s not in the public domain as Anthropic’s $1.5 billion copyright settlement with authors shows.
We have machines that can inform us, is the point. And the money runs on models that are in very large part quantitative. The S&P 500 is a quantitative model for quality and it’s 90% of market cap. (What’s the joke? There are thousands of companies in the S&P 500.)
Now to the shrill voices in our heads about transparency, relevance, volatility, it’s ever so rare that regulators bend the curve. But it’s happening here. In taking this matter up, the SEC shows more prescience than public companies, which should be on the leading edge of what the money is doing, not trailing somewhere back in the distance. Why have reporting requirements that are a couple decades out of step with the market and light years behind its technology?
Now to volatility. Guess what causes the majority of market volatility? Quarterly earnings reports. The more deliberation one shows around pumping machine-readable data into the market, the better.
Berkshire Hathaway has $1 trillion market cap and volatility of 1.2%, half the mean in the S&P 500. They put out a two-page quarterly release on Saturday and hold no call.
Just sayin’.
Volatility by definition is changing prices. Active money doesn’t as a rule want unstable prices. Machines do. Arbitragers do. The bane of Passive Investment is volatility. Cause a portfolio to stop tracking a benchmark because your price soars or plunges with earnings, and you’ll be out of that portfolio.
Your goal is to stay in it. Your IR goal is to get and keep your equity in front of the “the money,” which is mainly running on models.
Fewer arbitrage opportunities reduce volatility, good for the money we want to attract and keep. Proof is in the private market. There is no statistical arbitrage in private equity. Only public equities. Anything exchange-traded in a maze of markets. More than half the stock market’s volume doesn’t even change hands at stock markets. It’s off-exchange.
And the relevance of investor relations? The best thing we can do for our relevance is to be on the leading edge of what the money is doing and how the market works, not somewhere far behind.
We’ll be talking about that at the NIRI SRT in December. Sign up! And I’ll be in New York next week seeing companies and sharing our plan for implementing a deliberate strategy for this market dominated by Passive money. If you want to know more, let me know.
