Since we are in the midst of Q4 earnings season, I’d love to be able to tell you that this is a very important period of the year for publicly traded companies and investors alike. But in reality, earnings season has become a farce — a cat-and-mouse game CEOs and investors play with each other.

What Is Earnings Season?

Earnings season happens four times a year, encompassing the few weeks after the last month of each quarter (March, June, September, December), when the majority of public companies release their earnings results from the previous quarter.

Federal securities laws require these companies to disclose information on an “ongoing basis,” and every public company must submit a Form 10-Q, which includes unaudited financial statements and a continuing view of the company’s financial position.

The rules are in place largely so that shareholders can get a general idea of how the company whose stock they own is performing on a quarterly basis.

Sounds like a great idea, right — like a report card on your investment that comes four times a year.

Let The Games Begin

There was a time when nearly every company held an earnings conference call that coincided with the release of the company’s financials where the CEO and CFO would discuss the results and field questions from analysts and investors.

Then, gradually, many companies decided that a more controlled environment served their interests best, so they decided to eliminate the Q&A portion of these calls and  simply released a recorded statement. After all, they didn’t want some young punk analyst making them look bad by asking questions they weren’t always prepared to answer.

So now, earnings have become one of the most overrated components of the investment industry. Don’t get me wrong; 10-Q’s (and the annual 10-K) financial reports hold a wealth of valuable information on the condition of a company. I’ve spent my fair share of hours combing through these data figuring how the previous quarter’s economic climate affected a financial institution such as Bank of America‘s (NYSE:BAC) loan loss reserves.

I’ve also listened to countless earnings calls of retailers such as Best Buy (NYSE:BBY) where the CFO attempts to explain why margins were being squeezed so intensely on flat-screen TVs last period.

But let’s face it — most investors aren’t going through the financial statements with a fine-toothed comb every quarter, and sadly, neither are many analysts who cover these companies. It’s headline numbers that move the needle: Did your earnings-per-share come in above or below analyst expectations?

We’ll cover the manipulation of this metric another time, but in a nutshell, it’s like me telling you that your favorite NFL quarterback threw for 350 yards last week yet failing to mention he also had three interceptions — and oh, by the way, they lost the game.

How did your sales break down by product mix last quarter? How much money did you spend on expansion? Did your costs go up unexpectedly? Were there any contract changes with your suppliers recently? These are the kind of questions that need to be asked.

I Don’t Care About the Past

More importantly, what is your guidance for sales and earnings for next quarter? The markets are a forward-looking entity. What you will do next quarter or next year is always more important than what you did last year.

Of course, CEOs know this all too well, so they walk a fine line between giving guidance that’s too high or too low. Guide earnings for next quarter too high, and you may get an immediate spike in your share price, but now the pressure will be on to perform. If you don’t meet these expectations next quarter, it’s likely you’ll give back that short term jump and more in three months. But if you give guidance for next-quarter sales and earnings at a level significantly below analyst expectations, you risk a hit to the shares.

The Future Is the Future (Except When It’s Not)

Unless, of course, you have a history of being ultra-conservative.

Take a look at Apple (NASDAQ:AAPL). Apple is one of the most operationally efficient and well-run players in its industry, yet its revenues come in 16% to 20% higher than what they tell the street they expected nearly every quarter. It’s been common knowledge for some time now, so analysts adjust their estimates up in response.

Overall, about 60% of S&P 500 companies (on average, long term) report earnings results that are above expectations, and that figure is on a steady rise. Does this mean that 6 out of every 10 companies are excelling in their industry every quarter?

Hardly!

What this means is that CEOs have learned how to play the game. Whether you accept the theories of behavioral finance or not, the basic premise is that investors behave irrationally when it comes to their investments.

That’s why a great analyst — i.e., one who has learned to play a game that keeps changing — can be worth his or her weight in gold.

This makes what was intended to be a simple report card on a company’s condition into something so complex and convoluted that the average investor can’t follow it.

In this game, nobody wins; one side just loses more slowly than the other.

As of publication, the author does not own any of the securities mentioned here.