Anything you say can and will be used against you in the stock market, public companies.

By machines.

And I don’t mean just that stocks get hammered like ORCL yesterday, down 12%.  Stocks that rise 24% on earnings like PATH don’t benefit in the long run either.

dreamstime l 197774576

Photo 197774576 / Benchmark © Alena Dzihilevich | Dreamstime.com

Here’s why.  Most of ORCL’s top 25 holders, led by Vanguard – not counting Larry Ellison’s 42% stake – are Passives. Passives buy stable, liquid groups of stocks to match an asset-allocation model tracking a benchmark. That money doesn’t want a 12% gain. It wants the average.

The worst thing for Passive money is volatility.  Tracking errors.

Nearly all large-cap stock-pickers fail to outperform the benchmark. Literally, 95% of them.  There is no alpha in large-cap stocks.

So why is ORCL touting its financial performance when its largest holders own it because it’s big and stable and tracks the averages?

Not only did Larry Ellison take a big personal wealth hit, but now these Passive investors will have tracking errors and may exclude ORCL during index-rebalances this week.

ORCL would be better putting out a short statement that says, “Oracle, a large capitalization growth stock and the enterprise software leader, reported results for the quarter today. For details, see our 10Q. Thank you, goodbye.”

I’m paraphrasing.

Nothing is gained in detailing the bullets that ORCL offered.

By the same token, if PATH booms, it’s a bust for indexes, because it causes tracking errors for indexes and Exchange Traded Funds. Ahead, PATH will be de-weighted.

When a horse wins a race by a nose and the bets are ten-to-one, there is a massive transfer of wealth from winners to losers.

That’s what happens here.  There was nothing wrong with ORCL’s numbers. Every element of the business grew.

But suppose hedge funds were leveraged ten-to-one on a bet Netsuite revenue would grow 25% and instead it was up just 21%?

Bam!  Stock down 12%.

I’m offering an example only.  The point is, the stock didn’t fall because revenues were down 12%. It fell on arbitrage, speculation.

Why feed that?

If stock-pickers are shrinking, now down to about 30% of assets if everyone is honest about the pervasive use of models and risk-management schemes (like Aladdin, about which I wrote last week) in institutional money-management, why try to appeal to them?

Now, add in the behavioral data behind price and volume.

ORCL charged from about $100 to $117 between Oct 31 and Nov options-expirations around the 17th on swelling Passive Investment driven by an increase in asset-allocation to equities. Passive Investment rose to 29% of ORCL volume. 

But right before results, Passive Investment declined 45%. The driver of gains was gone. Bets had been placed. Machines changing prices jumped to 59% of ORCL volume.

You can know all those facts ahead of time. ModernIR has them. It’s part of the modern way to report earnings.

Here’s the crucial point. Reporting results as though the whale in the stock market is Active Investment is reporting results like it’s 1995.

Most public companies, it appears to me, have not observed what’s happened in their 13Fs, and among the managers running their 401ks, or how their employees are directing their 401k investments.

Passive Investment dominates all of them. Why then is the earnings release an Active Investment anachronism?

I’m repeating myself because it’s jarringly obvious in the data that we need to change our ways.

Yes, I get it.  The c-suite wants to trumpet its achievements, beating guidance and estimates.  The general counsel, perhaps woefully out of step with what the money is doing and how the market works (but whose fault is that?), thinks you need to keep doing what you’ve always done.

Somebody has to take leadership. That’s you, investor-relations professionals. Ideally, here’s what you do:

  1. Understand what characteristics your stock possesses that Passive money buys.
  2. Reinforce them in your release.
  3. Measure the data ahead of time to understand what the money has been doing.
  4. Keep your release short, neutral and bland to reduce bets.
  5. Set internal expectations with Supply and Demand in your trading.
  6. Measure what happens with earnings, and in the two following weeks.
  7. Repeat each quarter. And avoid reporting during options-expirations!

We can help. Ask us!

No combination of practices will eliminate volatility risk. But understanding that most investment dollars are buying products, not stories, and most of the money chasing stocks up or down with financial results is betting and speculating, is the starting point to improving shareholder-value.

And it’s way easier to achieve than alpha – outperformance (which less than 1% of stocks consistently attain). It’s very hard to beat the market. If it were easy, everyone would be a stock-picker. Instead, Blackrock rules.

But being average – what Passive money wants – is eminently achievable, and drives shareholder-value precisely because most of the money just wants the benchmark.

Stop trying to beat the benchmark. Aim now to BE the benchmark.

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