Monday, September 8, 2008

Record Earnings

The TD Bank recently announced record earnings for the third quarter this year. This sounds a lot more impressive than it really is.

If I leave some money in a savings account that pays 3% interest every year, I can expect to make “record earnings” every time I get paid interest. By leaving each interest payment in the account, the next interest payment will be larger than all the previous ones. So, a new record is set every time. Warren Buffett explained this in his 1977 letter to shareholders.

Pay raises tend to be very small these days, but by the standard of financial press releases, you can trumpet a new record income even if all you get is a 1% raise.

I’m not making any claims about whether TD Bank had a good quarter or not. But, you shouldn’t be impressed by any announcement of record earnings. It’s always necessary to dig further into the details to find out what is really going on.

3 comments:

  1. the word 'record' is used a lot in earnings and sales releases. It is a funny usage because records should be expected by shareholders each release. Why would anyone hold a stock if their expectation was not for 'record' earnings each year?

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  2. MG: I agree. However, the people writing these press releases must think that we are impressed by such records. Maybe most people are impressed.

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  3. Press releases sometimes look like marketing tools targeting easily influenced investors. As you stated, serious analysis is the key.

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