Tuesday, May 30, 2006
I just read the New York Times piece on today's down day on Wall Street. One sentence stood out: "Shares of Wal-Mart dropped $1.35, or almost 3 percent, to $48.30, after the retailer said its May sales growth would be at the low end of its expectations." Think about this for a moment. This mammoth retailer is giving monthly guidance on its sales! I run a small public company and I know how hard it is to predict sales with any certainty. To be giving monthly guidance seems crazy to me and reflects the way stock trading has changed since the bubble. It seems we now expect companies to be able to report by the minute how their business is performing. Why? Because it can be done of course. Not because it actually means anything. I can all too easily see how with the use of technology companies will have their stocks traded 24 hours a day seven days a week. To feed this constant market, they will be expected to report with ever-greater frequency. This is simply not a good thing. It drives businesses to run on shorter and shorter cycles. This means they stop investing in the long term and start responding simply to the latest analyst forecast. I'll be honest the only solution I see to this problem is for all companies to adopt the stance taken by Google that has been so widely ridiculed by Wall Street - namely not go give guidance. If everyone stopped giving guidance and simply let the analysts try and figure it out, we'd have a few rough quarters while they learned how the businesses they watch really work and then my guess is we'd end up with a much less volatile market full of businesses far more focused on the really important issues - like their customers.