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Let’s face it -- earnings season is exciting.
After three months of hibernation, the public companies we all love to follow, invest in, and criticize open up their books and reveal their quarterly secrets.
But let’s face another reality: A quarter is just an arbitrary three-month period. Sure, the quarterly changes can seem significant if profits drop 5%, or the market sells off the stock to a tune of 10%, but over the long term, quarterly reports are more distractions than signals of the future.
If someone told you she invested in a bank at the end of 1993 that grew its tangible book value per share by 2% a quarter, you probably wouldn’t think much of it -- would you? That 2% sounds kind of measly.
However, that same person could also tell you she invested in a bank at the end of 1993 that grew its tangible book value per share 484%. And that same person would have also benefited from price-to-tangible book value multiple expansion and gobs of dividends and seen a total return of a staggering 1,190%.
That 2% per quarter book value growth doesn’t seem so shabby now, does it?
This is a real-life example, and the bank was M&T Bank (NYSE:MTB).
As fellow Fool John Maxfield points out, M&T Bank was able to accomplish this outstanding performance by simply writing good loans. A bank that chases growth at the expenses of risk management will undoubtedly feel major pain during times of crises. M&T has felt some pain, but it's always been more of a pinch.
As previously mentioned, since the end of 1993, M&T Bank grew its tangible book value per share at a compounded quarterly month rate of roughly 2%. That doesn’t mean there weren’t tough quarters in the mix. During that time, M&T Bank’s tangible book value per share actually declined an average of once every five quarters.
Think about that. Quarterly tangible book value per share fell almost once every year, and the stock still produced a total return of 1,190%. Still upset about your favorite company’s latest "estimates miss?"
M&T Bank wasn't the only -- and today, still isn't the only -- company that can get rich slowly. Across the board, as we see droves of companies and banks report earnings, quarterly numbers continue to tell us virtually nothing.
Over at Bank of America, tangible book value per share grew 2% since the end of June, while JPMorgan Chase’s fell by 1%. Does this mean Bank of America is destined to produce M&T-like returns over the next 20 years? No. And it also doesn't mean JPMorgan Chase is a doomed investment.
There are no investment crystal balls that tell us which companies will be the ones to compound value over time via successful capital allocation, growth strategies, and risk management in the future. But we can look to a management team’s track record and comments about risk, how compensation incentives are aligned, and whether or not we are getting a reasonable expected return for the business.
Foolish investors and analysts should spend less time trying to break down the quarterly gyrations in hopes of revealing the optimal buying or selling opportunity and more time reading management’s letter to shareholders, reviewing proxy statements, and asking themselves if the price makes sense.
So next time your favorite company only posts 2% EPS growth, smile, kick back, and remember M&T Bank.