Volatility vs risk: How to read reporting season

During February and August each year, companies listed on the Australian Securities Exchange (ASX) must report their six-monthly financial accounts. This period always seems to be one of the most chaotic times for the share market, with some stocks moving up or down 15 or 20% in a day - and downwards seems to be more common.

The reason behind such large movements is often due to whether the company's results for the last six months were above or below the expectations of the analysts who cover the stock.

I lead a small division in an accounting firm and I know firsthand how hard it is to 'budget' for the next six months. So trying to work out within a few percentage points what the earnings of a listed company will be, is at the Olympic end of degrees of difficulty.

What has reporting season become so volatile?

Over the last few years, these reporting periods seem to have become ever more volatile. There are some sound reasons for this, including that the pace of information is reaching light speed, and algorithmic trading means that share prices are moving the instant that information is released.

We don't yet fully understand how the use of AI will change how shares are traded.

However, some things don't change and that is our behaviour as investors.

We tend to feel financial losses more strongly than gains, so a sudden drop in a share price will often have us reaching for the sell button. We might not understand why the share price has fallen, but the fact that is has fallen becomes the reason to sell.

What's the difference between volatility and risk?

This is where the distinction between volatility and risk needs to be clear. Volatility is the movement of a share price. Risk is the possibility of permanent loss of capital.

Benjamin Graham captured this distinction succinctly: "In the short run, the market is a voting machine; in the long run, it is a weighing machine."

Reporting season is when the voting machine dominates. Investors respond to earnings hits and misses, subtle changes in tone, and shifts in guidance. Expectations are reset quickly, and prices adjust just as quickly.

But over time, what drives returns for investors is not how sharply a stock moves in a single week but rather the underlying economics of the business. Can it grow earnings sustainably? Does it generate strong cash flow? Does it possess a durable competitive advantage that protects margins?

Warren Buffett often refers to this competitive advantage as a "moat". Consider a high-quality company with a strong brand or cost advantage. If it misses earnings slightly due to temporary cost pressures, the share price may fall sharply for a few days. That is volatility. It is uncomfortable, but if long-term earnings power remains intact, intrinsic value is largely unchanged.

Risk is usually a result of change, such as a change in management or strategy. There are many examples of stocks that have made a major acquisition to then kill the goose that laid the golden egg.

For long-term investors, confusing volatility with risk can be costly. Selling a quality business after a temporary earnings disappointment can lock in losses and forfeit the recovery that often follows once conditions normalise. Equally, ignoring genuine deterioration because a price fall "looks like just volatility" can be equally harmful. The challenge is to distinguish between temporary noise and permanent impairment.

That requires focusing on fundamentals rather than headlines: balance sheet strength, competitive positioning, pricing power and long-term earnings trajectory. Share prices will move around those fundamentals, sometimes aggressively. But over extended periods, returns are anchored to growth in earnings and cash flow.

Why reporting season should be seen as information, not danger

Reporting season should therefore be viewed as an information event, not a threat. It provides clarity about which businesses are executing and which are struggling.

February and August will likely always feel very noisy for investors. Single-day moves will continue to capture attention.

But volatility in itself is not the enemy; permanent erosion of a company's earning power is. Keeping that distinction in mind allows investors to remain steady when the voting machine is loud, and to stay focused on what the weighing machine will ultimately measure: sustainable profits and long-term value creation.

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