Blog Post

The Quarter Obsession is a Curse

Alex Berenson wrote a very important book, The Number, which highlighted the malaise that took over the stock markets – the obsession to meet the quarterly number. It is interesting to bring it up again, because Tom Evlsin, says that is precisely the reason why AT&T did a slow horrible and painful death. “The slow sinking of the once great ship that was AT&T has been sad to watch.  Like the stories of shipwrecks in the sailing magazines I like to read, there is much to learn from this catastrophe. Here’s one example I saw from the inside of how managing for the quarter hurt AT&T.” I agree with Tom, but feel that AT&T was a sum of many little failures, Maybe over the weekend I will sum it all up.

2 Responses to “The Quarter Obsession is a Curse”

  1. Om,

    I believe the focus on The Number dates to the very early 90s, when quarterly conference calls became prevalent on Wall Street. In the 80s, when I ran the T. Rowe Price Science & Technology Fund, no one cared whether an earnings estimate was accurate to the penny. Wall Street estimates were considered to be statements of direction. If a sell side analyst liked a stock, he or she had a high estimate. If not, the estimate was lower. Keep in mind that the 80s were a time when big cap stocks dominated the market. There were only a handful of hedge funds and a relatively small number of aggressive growth mutual funds. It was a relatively sleepy time.

    As the 90s began, small caps rose in importance to investors. Technology stocks started to take off, and with them came an explosion in the number of mutual funds. To address the growth in institutions, conference calls became a standard part of the investor relations process. From there a virtuous cycle began. Rising stock prices caused good performance, which brought new assets into funds. New assets demanded more stocks, which stimulated the IPO market. The result was an explosion in the number of stocks to be covered and a significant decrease in the average experience level of analysts and portfolio managers. Conference calls became the principle source of real time information, which led to the formalization of language used on calls . . . and the focus on The Number.

    Thanks to The Number, I decided in 1997 to look for a new investment model that would free me up from a focus on quarterly earnings. But that’s another story.

  2. Jesse Kopelman

    T’s offspring AT&T Wireless inherited the same problem and suffered the same fate. At one point there were hundreds of new cell sites built to the point where all that needed to be done was turn them on. The order came down not do do so, as a major payment had to be made to Bechtel when this milestone was reached. It was mid-Q4 and management wanted to delay this payment to Q1 of the following year. Funny how the wide spread grumblings about AT&T Wireless’ network quality started right around this time.