My wife Karen is reading Peter Attia’s book, Outlive, which is like reading it myself. I get the benefit of Karen as filter for tidbits and takeaways.
Now, I realize. Not everybody loves Dr. Attia. And I’m not suggesting he’s got all the answers. But he focuses on a purpose: Longevity. Extending high-quality life. Not just staying alive.
Illustration 5149030 © Kheng Ho Toh | Dreamstime.com
Having a purpose is the right foundation for new thinking about any problem. Take, for instance, how public companies report earnings. What’s the purpose?
Ask the CFO, CEO, the investor-relations officer for a public company and she or he will say, “To communicate differentiating information about our operations, financial performance and strategy.”
Some derivation of that, anyway.
To whom?
Well, investors, of course.
What kind of investors?
Says the IR officer: The kind that understands our business, our investment thesis, our strategy.
Does that kind of investor have money to spend?
Because just one thing matters: Getting in front of buyers.
Because getting in front of investors who are sellers doesn’t do much good. We don’t drive shareholder value by executing on a business plan and differentiating a story. We do it by attracting money.
Are public companies thinking about earnings the right way?
Data from the Investment Company Institute show that Active managers, stock-pickers, have lost about $500 billion annually to Passive managers for 15 years. Net the money buying and selling stocks and 100% of flows go to Passive investors.
Which buy shared characteristics, not unique stories.
Morningstar data show that the largest equity investment category now, with half of all assets, is Passive Large Cap Blend. In fact, combine indexes and closet-indexers and 70% of assets are Passive.
But Tim. Earnings multiples drive stocks.
Earnings are a measure of quality, yes. Quality in factor models is a series of financial measures. But investors in Quality as a characteristic aren’t buying stories. They buy quantitative data. And Quality ranks well below market cap, sector, value, growth, volatility, in factor models.
Summarizing, at least half the dollars in the market go to a category of equity product, not differentiated stories. And all the new money goes to characteristics: Passive models.
Public companies are pumping out uniquely differentiated stories by the thousands every quarter via press releases and financial reports. Yet the money that consumes stories is shrinking. It’s not a buyer. It’s a seller.
Are earnings releases doing anything to advance shareholder value if what they contain and what money buys don’t match?
Investors want a product called equities that reflects a set of shared characteristics such as market cap, value, growth, sector, industry, liquidity, volatility, quality.
What if your earnings release primarily conveyed those characteristics?
It’s a start.
And what’s the worst thing that can happen to money that buys shared characteristics?
Let’s go back to the beginning, to Peter Attia. What’s the purpose of medicine? It’s been to treat diseases. He argues that we need new thinking. Medicine 3.0 is preventing disease through proactive health-management. A strategy for longevity.
In the stock market, the strategy behind buying characteristics is tracking a benchmark. What derails the strategy is volatility.
Because it causes performance to skew from the average.
So your aim, public companies, should be to deliver a product that the money wants. And dampening volatility is critical. Volatility is nothing more than changing prices. Machines change prices in reaction to data, correct or incorrect (see my story about LYFT).
The strategy follows logically: Emphasize your characteristics so trackers of benchmarks and the machines behind the market’s vast arbitrage know what you are and hew you toward those characteristics.
Take out of your earnings releases the differentiators that create volatility. Because a temporary sugar-high like a 15% gain on results will cost you later. You’ll be abandoned by the money that needs to track the benchmark.
And use value or growth key words that match your Demand/Supply characteristics. Measure the data behind performance each quarter so you build data history on behavioral change. We can help you with all four — emphasizing characteristics, neutralizing your release, using key words, measuring data.
In sum, learn to be Beta. The benchmark, the market. There’s the purpose. It begins with new thinking built around what the money wants.
