How does Warren Buffett view companies that pursue 'smooth' quarterly earnings reports?
Warren Buffett's View on Companies Pursuing "Smooth" Quarterly Earnings Reports
Buffett has repeatedly expressed negative views in his shareholder letters regarding companies that pursue "smooth" quarterly earnings reports. He believes this practice often involves accounting manipulations—such as adjusting reserves, deferring expenses, or prematurely recognizing revenue—to artificially create stable profit figures rather than reflect the true state of the business. Buffett emphasizes that genuine business activities are inherently volatile, and fluctuations in earnings are normal. Deliberately pursuing smoothness typically indicates that management prioritizes short-term appearances and Wall Street expectations over long-term value creation.
Key Excerpts and Analysis
- Criticism of Accounting Manipulation: In his 1988 shareholder letter, Buffett noted that many corporate managers are keen on "earnings smoothing" because it stabilizes stock prices and meets analyst forecasts. However, he considers this a "fraud" that misleads investors and obscures the true risks and opportunities of the business.
- Value Investing Perspective: As a value investor, Buffett favors transparent reporting. He argues that excellent managers should honestly report earnings volatility rather than using "creative accounting" to gloss over issues. This enables investors to make rational decisions.
- Berkshire Hathaway’s Practice: Buffett’s own company never pursues quarterly earnings smoothing. He even stated in his letters that Berkshire’s profits may fluctuate significantly due to market or operational factors, viewing this as a reflection of authenticity.
Takeaways
Investors should be wary of companies with excessively "perfectly smooth" earnings, as this may conceal underlying problems. Buffett advises focusing on long-term economic value (e.g., intrinsic value growth) rather than short-term numerical games. This embodies his value investing philosophy: authenticity over appearance.