Investing501 has contributed several thought provoking articles to Seeking Alpha and this particular one got us thinking about why we listen to an earnings conference call and why a long-term investor should listen to an Earnings Call - real time or otherwise. For our investing style, which primarily is about long-term investing in profitable market/technology leaders, we find that listening to conference calls is important.
We tend to agree with Investing501 that real time conference call listening in general is not essential for a long-term investor, but we have a different take on this issue from the writer on many different issues.
Firstly, the author talks about following one hundred companies and listening to four hundred conference calls a year. Covering hundreds of stocks, we believe, is the domain of a paid analyst and not a typical Seeking Alpha reader. And, if there are investors listening to hundreds of conference calls, then we wish them luck with their investing style. We would rather follow a much smaller set of companies and get to know them better than having superficial knowledge about a hundred different companies that we may never invest in. And, how many stocks is one investor going to have in a portfolio anyway?
The second aspect we have a different take from Investing501 is the frequency with which we listen to these conference calls. We see absolutely no reason to listen to all the conference calls of the companies that we follow. In general, we do not listen to a company's conference call unless we have specific concerns about a company. We find that the need to listen to a conference call is higher when a company is going through major changes and a change in investment thesis is in order. In particular, listening to conference calls of early stage technology leaders can be highly rewarding.
During normal course of investing, we see no reason to listen to the conference calls of about 75% of the companies in our portfolio. If an investor follows 20 stocks and listens to conference calls of 4 or 5 of the companies, it is not a massive investment in time and it is a great way to understand the investments.
Getting into specifics, here are some of the key reasons we listen to the earnings calls:
Information about management and the company: There is widely held misperception in investment community that it is a company's management that makes a company great. We generally find that not to be true. A good management, especially in the technology industry, is a steward of a great idea set in motion by the founding team. More often than not, the issue is if the idea can survive poor management. As Warren Buffett once said: "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." Most of the companies that we love can be run by second rate management. If a company requires a top rate management, then it is probably not a great long-term investment anyway. However, there is a limit to how far a good idea can go with a bad management team. Given enough time incompetent management can obliterate the company's wealth generation potential. Sometimes we want to know how bad the company's current management is and if the company can thrive in spite of them. We also like to hear the management being forthright and professional in their dealings with shareholders and analysts. The language and the tone that management uses in the conference call and the way the management responds to analysts' questions, and what they say, conveys a lot. In this particular regard, we find conference call transcripts to be poor substitute to the real thing.
Information about competition: Many times we find information about competition, sometimes companies that we have never heard of, from the earnings calls. The discussion of competitive dynamics can help validate the investment thesis or point to an exit plan from the investment. The commentary may also provide an entry plan into new companies.
Information about customers: Information about current and future customers is another area that we pay special attention to. This is particularly important if we have or planning to have other investments across the industry value chain.
Information about the market: Some of the questions asked and the management's answers about growth areas and shortfalls reveal subtle economic trends that may be invaluable in making future investment decisions. We find this particularly useful in businesses sensitive to economic changes.
Information about analysts: Sometimes listening to a conference call is enlightening in terms of analyst coverage. The quality of the coverage can sometimes tell us if the business is underappreciated or overvalued. It also gives us a good idea what analysts are worth listening to.
Of the reasons mentioned above, the first reason is the only one that requires that we listen to a conference call - a transcript will simply not cut it. For the other items, a reading of conference call transcripts may be adequate. But, even in these cases, we find that sometimes there are errors in the transcripts and the transcripts may not always be perfect substitutes.
In summary, we find listening to select conference calls a good use of our time and a way to stay on top of our investments. We also find that conference call transcripts are an exceptional tool to review historical information.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.