I saw a tweet this morning in the search feed for Estimize that represents a certain line of thinking I’ve heard over the years which is incredibly misinformed. I’ve been meaning to write this post for a while and just never get around to it, but it’s an important one.

“Estimize is just another representation of the extraordinarily short term focus of market participants.”

The number of hours wasted by humans bemoaning (wrongly) the focus on the quarterly earnings “game” is innumerous. These individuals, who run the gamut from individual investors to the largest asset managers in the world, hold a certain dogmatic view, mostly of the efficient markets flavor. The short term focus the tweet above ascribes to Estimize is obviously of the negative variety (then again, have you ever heard anyone use short term and investing in the same sentence in a positive way?).

So why is this line of thinking incredibly flawed? The answer is pretty simple.

At the end of the day the entire market is a forward looking mechanism. All information about a company or its stock available to the market today will be used (inefficiently) to project where a company and the supply/demand for its stock is headed in the future. Investors inherently DO NOT CARE exactly what a company earns today, that is not how assets are priced. This is where the people who espouse views like the one above are simply lazy or naive in their thought process.

What a company earns this quarter is incredibly important to understanding what it will earn next quarter, next year, and 5 years from now. Each earnings report gives us clues as to the trajectory of a company’s business, which at the end of the day is the most important piece for being able to discount the future into some price you’re willing to pay for the stock today.

The game of quarterly estimates is simply the manifestation of what investors have discounted into the stock in terms of expected fundamental performance. You NEED to understand what expectations for a given company are in order to understand what is baked into its price. Now, the reason we built Estimize was that the number everyone was looking at to represent what was baked in was basically a lie. The sell side was making artificially high estimates going out a year or two and then bringing them artificially too low right before the report. Investors couldn’t really get a great read on what was actually baked in by looking at these numbers because they were a sham. That’s why hedge fund analysts will call around to each other to find out what their peers really expect and triangulate what’s actually baked into the stock. Estimize solves that problem for them by making that collection process more efficient and accurate.