Why does Charlie Munger oppose 'quarterly earnings culture'?

The reason Charlie Munger vehemently opposed the "Quarterly Earnings Culture" is that he believed this culture fundamentally distorts the essence of business operation and investment, shifting the focus from creating long-term value to meeting short-term market expectations. This opposition is rooted in his profound value investing philosophy and insights into human nature.

Here are the core reasons why Munger opposed the quarterly earnings culture:

## 1. Encourages Short-Termism

This is Munger's central argument. The quarterly earnings culture forces company management to focus excessively on financial data for the next 90 days. To "meet or beat" Wall Street analysts' profit expectations, they may make decisions that harm the company's long-term competitiveness.

Delaying Necessary Investment: Management may postpone investments in critical areas like R&D, new equipment, employee training, or brand building because these expenditures immediately increase current costs, thereby reducing quarterly profits. Yet, these are precisely the cornerstones for building a company's "moat."
Cutting Essential Costs: To "hit the numbers" at quarter-end, companies might slash marketing expenses or implement unnecessary layoffs, damaging future growth potential and customer relationships.

Munger believed that great businesses are built through years or even decades of sustained investment and sound decisions, not by winning consecutive 90-day "battles."

## 2. Distorts Management Incentives

When management bonuses, stock options, and reputations are tightly linked to quarterly Earnings Per Share (EPS), their behavior becomes distorted. Their goal shifts from "how to run the company better" to "how to make this quarter's numbers look better."

Borrowing from the Future: To hit quarterly sales targets, management might push excess inventory onto distributors (Channel Stuffing) or offer unnecessary deep discounts. This essentially borrows sales from the next quarter and offers no benefit to the business's healthy development.
Focus on Predictability over Excellence: Companies tend to pursue smooth, predictable profit growth rather than taking necessary risks for breakthrough innovation. A single failed attempt could lead to an "ugly" quarterly report, triggering a stock plunge and investor scrutiny.

## 3. Creates "Accounting Games"

Under intense performance pressure, management has a strong incentive to "manage" earnings rather than genuinely create them. This leads to the abuse of various accounting techniques, distorting financial information.

Earnings Smoothing: Hiding some profits in good years (e.g., by setting up excessive reserves) to release them in bad years, creating an illusion of stable business growth.
Manipulating Non-Recurring Items: Beautifying core earnings data by selectively selling assets or adjusting accounting estimates.

Munger believed such practices mask the true volatility and risks of a business, preventing investors from seeing the company's real condition. He admired management that communicated candidly without sugarcoating.

## 4. Increases Market "Noise," Not Signal

The release of quarterly earnings and the ensuing clamor over "beating" or "missing" expectations, in Munger's view, is market "noise." Wild stock price swings over differences of a few cents per share have nothing to do with the company's long-term intrinsic value.

Encourages Speculation: This culture encourages investors to become speculators gambling on earnings reports, rather than long-term partners investing based on business fundamentals.
Distracts Attention: It diverts the focus of the market, media, and investors onto minor short-term fluctuations, neglecting more critical fundamental issues like macro trends, industry structural changes, and the company's core competitive advantages.

## 5. Contradicts the "Business Owner" Mindset

Munger and Buffett always emphasized that investing means thinking of oneself as a business owner. A true business owner (like the founder of a family business) would never cut an R&D project crucial for the company's competitiveness over the next decade just to make one quarter's books look good.

The quarterly earnings culture forces public company CEOs to act like "servants of the stock market," rather than stewards or owners with long-term responsibility for the enterprise.

Conclusion

In summary, Charlie Munger opposed the quarterly earnings culture because it is a systemic poison that:

Rewards short-term thinking and punishes long-term vision.
Encourages financial manipulation rather than value creation.
Creates market noise that obscures business reality.
Erodes the stewardship mentality that management should embody.

He advocated for a more rational, long-term perspective: Focus on building and holding a collection of great businesses with durable competitive advantages, letting time and compound interest do their work, rather than being held hostage by the frenzy of performance every 90 days.