Which of these 2 companies would you rather own?

When 'great' isn't good enough…

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I'm going to give you two sets of numbers.

The first company delivered:

Revenue growth of 41%
Operating profit growth of 46%
Net profit growth of 47%

No question — a stunningly successful year.

The second company turned in:

Revenue growth of 11%
Operating profit growth of 7%
Net profit growth of 3%

Both companies had positive results. They are more relevant this year than they were last year, by any measure.

But they're not even in the same ballpark.

As you'd expect, the share price reaction was very different.

Just not in the way you think.

The first company, which improved by around half?

Its shares were DOWN 14% at midday today.

The second one, doing well, but not exactly shooting the lights out?

Its shares were UP 12%.

The boffins call August 'earnings season'.

It's better described as 'expectations season'.

Yes, your results matter, but far less than:

a) What the market was expecting for the last 12 months

AND

b) What you tell the market to expect over the next 12 months.

The first company is A2 Milk Company Ltd (ASX:A2M), by the way. The other one is Carsales.com Ltd (ASX:CAR).

Oh, and in case you weren't paying close attention, another company, Corporate Travel Management Ltd (ASX:CTD) — I own shares — was up 10% soon after the market opened.

At midday, it was trading down 6%. That's a 15% turnaround in less than two hours.

Its revenue was up 20%. Operating profit grew 20%, too. Net profit was up 12%. The company's outlook was positive, but it (very reasonably) flagged that Brexit and the Hong Kong protests could be short-term headwinds. And shares are down.

Given all of the above, I hope you'll excuse me laughing heartily next time someone suggests that the market is 'efficient'.

All three companies are currently Buy recommendations in at least one Motley Fool service, by the way, and for good reason.

See, we're long term investors. And while our investing styles sometimes differ from each other, we all agree in the value of being long-term. And of ignoring the market.

As Warren Buffett reminds us:

"Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence."

Simply, we expect the long term futures of those three businesses to deliver us market-beating performance. The same is true of the other Buy recommendations we currently have in our services.

But, particularly on days like today, it helps to remember Buffett's parable of Mr. Market.

We like each of those three businesses more today than yesterday. They all remain Buy recommendations.

Mr. Market is doing his thing. That's okay, even if it can sometimes feel unnerving. There's nothing worse than feeling that maybe the market knows something you don't.

Does it? Well, if it did, the price movements today wouldn't have happened — because 'the market' would have known it all yesterday, too.

In the short term, prices will fluctuate for all manner of reasons.

In the long term, they'll follow the true value of each business.

The difference between the two is where you'll find market-beating opportunity.

Motley Fool contributor Scott Phillips owns shares of Corporate Travel Management Limited. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended carsales.com Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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