Earnings Don’t Matter

Earnings Don’t Matter

I signed off with one of my recent Daily Dirtnap newsletters by saying “earnings don’t matter.”

What? Earnings don’t matter? How can this be? With all the focus that the financial news networks and the newspapers place on earnings, you’re telling me they don’t matter?

That’s right—they don’t matter.

As usual, it is sentiment that matters. Everyone was freaking out about this earnings season, calculating out some earnings per share for the S&P 500, putting a multiple on it, and saying that we had 20% more downside. Expectations for earnings were very low, it was not hard to beat those expectations, and stocks went higher. Stocks went higher on bad earnings. If you had advance knowledge of the earnings—if you knew what the earnings would be ahead of time and traded on it, you’d be broke. You’d have thought that stocks would be 10% lower. And wrong, as usual.

It pains me to see this. It pains me to see people spend their entire lives manipulating numbers in a spreadsheet, thinking it’s going to give them some insight into what the stock market will do. Imagine spending 30 years of your life doing this and then realizing that it was a huge waste of time. The entire sell-side analyst community on Wall Street is a huge waste of time. OK, I take that back—they serve an important function, but predicting where stocks are going to go is not one of them. They are intermediaries more than anything.

The CFA is a huge waste of time, but my shtick on that is getting kind of tired.

Earnings don’t matter. Fundamental analysis does not matter. What matters is how people feel about a stock. Was fundamental analysis a help in predicting that Tesla would go up 10,000%? Based on the numbers alone, that should not have happened. But Tesla became an affinity stock or a meme stock, or whatever you want to call it, and human emotion took over. People keep waiting for it to return to fair value, whatever that means. Maybe it will; maybe it won’t. Don’t buy any green bananas.

Mob Mentality

I’ve written a couple of 10th Man newsletters about sentiment trading before, including one from pretty recently. I wonder if people get tired of hearing about it. I never get tired of talking about it. It is the key to investing. It is the key to life.

I’ll tell you a little secret of mine. Natural disasters don’t scare me. I live in a hurricane zone—we actually just got the sloppy seconds of Hurricane Ian a few weeks ago—a direct hit on my house in South Carolina. Didn’t break a sweat. I’m not afraid of earthquakes, tornadoes, or anything else.

You know what I am afraid of? Mobs. Large groups of people acting irrationally.

During the George Floyd protests of 2020, I freaked out. I installed a security system in my house. I bought a bunch of weapons. I even kept a thing of pepper spray near the front door in case I needed to spray anybody who was trying to break into my house.

This wasn’t a political statement. In fact, as a libertarian, the treatment of suspects by police, especially minorities, had been a pet issue of mine for a while, but I was afraid of mobs. I live pretty far from Myrtle Beach, and the chance of some angry mob marching down my street was next to nothing, but I freaked out nonetheless. Part of this is because of my experience in markets and watching what large groups of people acting irrationally can do.

Much of the financial education of the last 10 years has focused on making investors more rational. That is the wrong approach. Human beings will never be rational. The goal is not to be rational; the goal is to profit off the irrationality of others. People are smart; large groups of people are stupid. This creates opportunities. Lots and lots of opportunities.

What Are the Opportunities?

Economist Nouriel Roubini was tweeting unironically the other day about World War III. He thinks it is “likely.” And a lot of people share that opinion.

Guys. It’s not going to happen. Not only is it not going to happen, just the fact that you are saying that is a big sentiment indicator. I’ve been saying this for a while—sentiment today is worse than it was during the financial crisis. Much worse. This isn’t just about the housing market imploding—people actually think that the world is going to come to an end.

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Large groups of people acting irrationally, like I said. The opportunity here is to buy stocks. More precisely, the opportunity occurred on the last CPI release on Thursday, October 13—that was the moment—and we are already up 8% since then.

It’s time to buy. I can prove it.

I’ll be here all week. Tip your waitress. Try the veal.

Jared Dillian


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Fundamental investing and technical analysis are vulnerable to human behaviour—but human behaviour itself is utterly predictable and governments' actions even more so.

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Jared is no longer writing the 10th Man.

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