I am not a numbers guy, and have always had trouble understanding the way the Stock markets function. I happened to chance upon “The Number” by Alex Berenson and picked it up for it’s tagline: “How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America”.
It was a good decision. This is a remarkably well written book, light to read and Alex does a great job of simplifying the financial jargon for guys like me….In the 2 hours that I spent with this book so far, I have learnt a whole lot about the market and its intricacies, than I have learnt in any other way. Worth every penny of the 600 bucks that I spent on it.
An excerpt from the book.
On Wall Street, not all numbers are created equal.
But one set of numbers burn brighter than the rest. Every three months, publicly traded US companies report their sales and profits to the shareholders. Their quarterly announcements are the lodestar that investors – and these days, that’s most of us – use to judge the health of corporate America.
..every quarter they add up their sales and costs, and figure out where they stand. They tell the world in press releases and conference calls and most important in reports that they file four times a year with the Securities and Exchange Commission, the federal agency that regulates U.S. stock markets. To be precise: Three quarterly reports, or 10-Qs submitted to the S.E.C within forty-five days after a quarter ends. One 10-K, the big one, the audited annual report, to be filed less than ninety days of the end of a company’s fiscal year. Qs and Ks in Wall Street shorthand.
Qs and Ks are monuments to numbers. Revenue. Selling, general, and administrative expenses. Operating income. Interest paid. Columns of huge numbers, eight, nine or ten figures long, fall down the page in black and white to land with a bang disguised as a whimper at one small number: earnings per share.
Even within a profit report, not all numbers are equal. For traders and investors of all sizes, EPS is the ultimate mark of a company’ success or failure. Has it risen from the previous quarter and the previous year? Has it met the “consensus” – the average estimate of the Wall Street analysts who follow the company? More than any other number, EPS determines whether a company’s share will rise or fall, whether its chief executive will be rewarded or fired, whether it will build a new headquarter or endures a round of layoff.
On Wall Street, a place of little subtlety, EPS is known simply as “the number”. As in “What was the number for Pfizer?” EPS is the number for which all other numbers are sacrificed. It is the distilled truth of a company’s health. EPS is the number that counts.
Too bad it’s a lie.