← Money Lessons with Andrew Temte, PhD, CFA
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When management knows the stock will be punished for missing consensus, the temptation is to manage to the quarter rather than to the long term. Cut R and D expenses to protect this quarter's earnings. Delay a capital investment that would pay off in five years. The competitive cost is real. While one company is managing optics, another might be making the investments that are necessary to capture the next decade of growth. Hi, I'm Andy Tempte and welcome to Money Lessons. Join me every Saturday morning for bite sized lessons that are designed to improve financial literacy around the world. Today is May 30, 2026. Last week we walked through what happens when a private company goes public. The underwriting process, the roadshow, the offering price set, the night and the first day of trading. We ended at the moment that regular public trading begins. So today we're going to pick it up from there. What does the life of a public company look like? Well, the first thing that a newly traded public company has to manage is the lockup. A lockup is a contractual agreement that prevents insiders like founders, employees and the venture investors who held the shares before the ipo. It prevents them from selling their shares for a set period after the offering, which is typically 90 to 180 days. The purpose of this provision is straightforward. If everyone who held shares before the IPO could sell on day one, the flood of supply could crater the price. The lockup keeps that supply off the market while the new stock finds its footing, which makes lockup expiration day a known event on the market's calendar. Let's return to our Airbnb example from last week. The offering, priced at $68 a share on December 9th of 2020. Remember, that's what the institutional investors paid on the first day of regular trading. In the secondary market, the stock closed at 144.71 and the stock up expired about five months later on May 17th of 2021. That day, with the company's earnings report out a few days earlier and insiders free to sell their shares for the first time, the stock fell more than 6%, landing around $132, which coincidentally is the price today. The market knew the date was coming. Investors had priced some of the impact in but the drop. The lesson is that lockup expiration can be an opportunity for savvy long term investors to buy on this dip beyond the lockup, a public company lives under a permanent disclosure regime. That regime traces back to the securities Acts of 1933 and 1934, which we covered in our November 15 episode on the aftermath of the 1929 crash. The SEC enforces those rules today, and they show up most visibly in three specific filings that drive the rhythm of public company life. The first is the annual report known as the 10K. It runs hundreds of pages in length and includes audited financial statements, a description of the business, risk factors, and management's discussion of the year. It must be filed within 60 to 90 days of fiscal year end. If you really want to get to know a company, read the 10K. The second report is known as the 10Q. It's shorter than the annual report, the financial statements are unaudited, and it's filed three times a year. The fourth quarter is captured in the 10K. Instead. The 10Q is due within 40 to 45 days of the end of each quarter. The third report is the on demand filing known as the 8K. When something material happens, like a CEO departure, a major acquisition, a bankruptcy, or a significant cybersecurity incident, the company must file an 8K within 4 business days to let the public know what's happened. Now the 10Q is a legal filing, but around each quarterly report sits an event that is just as consequential. It's called the earnings call. An earnings call is a bit of theater and is a scheduled phone call open to the public, in which the CEO and CFO present the quarter's results and take questions from industry analysts. The format is consistent across companies. Management talks first, which is usually a review of the quarter, the financial highlights, and sometimes guidance for the quarter ahead. And then the call opens to questions from analysts, not the general public, analysts who follow the company professionally and publish their own forecasts of how the company will perform. The most closely watched of those forecasts is earnings per share, or EPS, which we covered in our April 18 episode. EPS is a company's profit divided by its shares outstanding, and it's the single number that Wall street watches most carefully each quarter. Each analyst covering the company publishes their own EPS forecast for the upcoming quarter, and the average of all of those individual forecasts is called the consensus estimate Estimate. When a company reports its quarterly earnings, its actual earnings per share is compared against that consensus. Beating consensus tends to push the stock up. Missing consensus, even by a penny, can push it down sharply. A penny. Think about that. A company can earn billions of dollars in a quarter, and a $0.01 miss against the consensus. EPS can erase tens of billions of dollars in market value before lunchtime. Now that brings us to a real cost that the reporting cycle and the consensus dynamic together impose on how companies are run when management knows the stock will be punished for missing consensus, the temptation is to manage to the quarter rather than to the long term. Cut R and D expenses to protect this quarter's earnings. Delay a capital investment that would pay off in five years. Make accounting choices that smooth out the numbers. The competitive cost is real. While one company is managing optics, another might be making the investments that are necessary to capture the next decade of growth. And this is not a fringe critique by Andy tempte. In a June 2018 op ed in the Wall Street Journal titled Short Termism Is Harming the Economy, Warren Buffett and Jamie Dimon, the chairman of Berkshire Hathaway and the chairman and CEO of JP Morgan Chase, respectively, argued that quarterly earnings guidance often leads to an unhealthy focus on short term profits at the exp sense of long term strategy, growth and sustainability. Companies, they wrote, often hesitate to spend on technology, hiring and research and development to meet quarterly forecasts that factors outside of their control can throw off. And the pressure has discouraged companies with a longer term view from going public at all, depriving the broader economy of innovation and opportunity. Now reasonable people disagree about how big this effect is, and the disclosure regime exists for good reason. Investors deserve to know how the companies they own are performing, and the absence of disclosure is what gave us the 1929 era abuses that we discussed last November. Let me share something from my own time in the corporate world. I worked for Kaplan, a Graham holdings company, for over two decades. CEO Don Graham led that portfolio with a genuinely long term view, and even so, we felt the pressure of quarterly reporting in our business unit updates and it goes wider than that. Corporate paper budgeting cycles, performance reviews and bonus structures across American business at both public and private companies have conformed to the rhythm public reporting created. The quarterly cycle shapes how corporations operate, even those that aren't bound by the rules. Now there's one last shift worth naming. The CEO of a private company runs the company and answers, usually to a small board that is often dominated by founders and early investors. In contrast, the CEO of a public company runs the company and continuously narrates it to analysts, to large shareholders and to the financial press. The the board they answer to also changes in character. Public company boards must have a majority of independent directors and an independent audit committee, and they bear formal responsibility to all shareholders. They hire the CEOs, they set executive pay, and they oversee major decisions. A significant share of senior management's time is spent on quarterly results, investor meetings, board work, and preparing for the next earnings call. That's not a complaint. It's a description of what the job becomes when management is responsible to thousands or millions of public shareholders. Now, what does this mean for you when you buy a single share of a public company? You're buying into all of this. The quarterly cadence, the analyst's noise, the temptation towards short termism. The system can also be turn to your advantage. A long term investor who isn't trading every quarter can use short term noise as an opportunity. A stock that's punished for a $0.01 miss to its earnings per share is often a better bargain a week later than it was a week before. Now don't confuse quarterly noise with long term signal. The quarter is just a snapshot. The longer arc is where the real story plays out. Next week we'll move from owning shares to a different mechanic entirely selling shares you don't own. We will talk about short selling, how it works, why it exists and why it can go very wrong very fast. Until next week, I wish you grace, dignity and compassion. My name is Andy Tempte and this is Money Lessons. You can find the show on all the major streaming services as well as out on YouTube. Please like subscribe, rate and most importantly, share this public educational good with your friends, your family, your colleagues and maybe a neighbor. The show was produced by Nicholas Tempte and we'll see you next week on Money Lessons.