Corporate jargon is an irritating fact of life. But it can also damage your investment returns, if a new study is to be believed, reports John Authers in Bloomberg. Analysts at investment bank Nomura looked at the language used by top executives at America’s biggest listed companies (those in the Russell 1000 index) in conference calls discussing their annual and quarterly results, going back to 2014. They used a readability tool to rate the communications for complexity (readability tools analyse aspects such as sentence length and choice of words). They found a strong correlation between clarity and returns: share prices of the stocks whose executives used the clearest language in calls far outperformed those who waffled or used lots of impenetrable jargon.
This makes logical sense. If someone can’t explain their business strategy clearly, it usually means one of two things: either they don’t know what they’re doing, or they do know what they’re doing, and they’re trying to hide it from you. Neither is a good prospect for an investor. What’s more, the analysis backs up previous research into the relationship between corporate communications and earnings. For example, one study published in the Research in International Business and Finance journal in 2016, found that French companies that used more complex language in earnings reports also were more inclined to use debatable accounting techniques to make their results look better than they really were.
Lessons for investors
There are many examples of skilled communicators who have done well for their investors over the years. Warren Buffett’s annual letters to Berkshire Hathaway shareholders are perhaps the most-scrutinised corporate documents in investment history. In his own shareholder letters, Amazon founder Jeff Bezos also proved highly skilled at boiling down a complex business to some key strategic points. Here in the UK, fund manager Terry Smith is admired for his forthright views, while a large part of Simon Wolfson’s success as head of retailer Next is his commitment to explaining very clearly what the company is doing and why.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Yet you don’t need to hunt down CEOs or managers with exemplary communication skills. Here’s a simple test to carry out on your own portfolio right now. Look at your holdings. Are you confident that you could clearly explain to another interested investor what your reasoning is for owning each fund or stock? Try to sum it up in a sentence for each one. If you can’t, then maybe it’s a sign that it shouldn’t be in there – or at the very least, that you need to do more homework. Give it a go – I suspect you might be surprised.
-
London Stock Exchange gets go-ahead to run Pisces private stock marketThe Pisces market will allow investors to buy and sell shares in private companies. But how will it work, when will it launch, and who is allowed to use it?
-
Could landlords face National Insurance on rental income?The Treasury is said to be considering a tax increase for landlords in an attempt to boost revenue in Rachel Reeves’s Autumn Budget
-
Investors rediscover the virtue of value investing over growthGrowth investing, betting on rapidly expanding companies, has proved successful since 2008. But now the other main investment style seems to be coming back into fashion.
-
What we can learn from Britain’s "Dashing Dozen" stocksStocks that consistently outperform the market are clearly doing something right. What can we learn from the UK's top performers and which ones are still buys?
-
Europe’s forgotten equities offer value, growth and strong cash flowsOpinion Jonathon Regis, co-portfolio manager, Developed Markets UCITS Strategy, Lansdowne Partners, highlights forgotten equities he'd put his money in
-
The flaw in Terry Smith’s strategy at FundsmithOpinion Fundsmith has invested in some excellent companies, but it has struggled to decide when to sell, says Max King
-
How to invest in the travel industry's boom as tourists get back on the roadThe travel industry is in rude health despite uncertainty about the global economy, Trump’s policies and geopolitical concerns. Investors should buy in now
-
Earnings estimates are a rigged game – especially in the USThe number of US stocks beating earnings estimates tells us only that guidance has deliberately been set too low
-
Profit from the potential in funds focusing on private assetsOpinion Charlotte Cuthbertson and Tom Treanor of the Migo Opportunities Trust highlight three funds where they'd put their money
-
How to cash in on investment trusts that are selling upManaged wind-downs and portfolio sales can be an attractive opportunity for patient investors
