The Nightmare On Wall Street

Investors,

There are four times a year when an analyst is graded on their stock picks. Q3 2021 earnings is one of those periods. It is the time of year when I head to the office a bit earlier and leave a tad later. The time of year when I dust off my financial models and clean them up.

Waiting for a company to announce their earnings is similar to Christmas. You are either disappointed in the results or excited as you see your stocking is stuffed with profits and not losses.

You have high expectations for one company and low expectations for the other. It’s the time of year where the boys are differentiated from the men. The amateurs from the professionals. The emotional investors from the level-headed hedge fund managers.

I started my job on Wall Street as a glassy eyed analyst. Zero professional training. I read annual reports and took notes as a retail investor, that is about it. I had no understanding how to build financial models, let alone the skill level it took to forecast future cash flows. Earnings season was the most stressful part of my job. I dreaded it. The Nightmare on Wall Street four times a year.

My boss expected me to have the all of my models updated before he came into work. Everything read and understood. Did the company generate free cash flow? Why did the cash on the balance sheet go down? Any reason why GAAP taxes are different from cash taxes paid? What do you mean you don’t know why that segment lost money this quarter?

Every earnings period was like this as a first year analyst. As the years progressed so did my financial skill level. Three and a half years into the profession I was finally feeling confident in my ability to digest all news and dust the models off. 10,000 hours of work and I finally had mastered the art of earnings season.

I have now been an investor for ten years. Five of those years as a professional. Earnings season doesn’t scare me like it used to. But it still humbles me. When you are on your A game and you keep killing it in the market, it is easy to get cocky. Overconfidence is the killer on Wall Street. When your cockiness reaches peak levels, that is when the market swoops in and starts its humbling process. Shows you how wrong you were about the future free cash flows an asset could generate.

I want to spend the remainder of this letter to focus on my expectations for the companies I currently own. These expectations will likely be way off, but probably directionally right. If I swing and hit 70% of the balls I will do alright. In this game it is about taking the swings at the biggest easiest pitches you can find. And knocking that ball out of the fucking park.