Item: Jan. 11, 2000—Yahoo reports earnings of 19 cents a share, beating the official consensus on Wall Street of 15 cents a share. Yet its stock plunges more than $25 a share within minutes of the earnings release.

What was going on here?

In a couple of words: Whisper Numbers. These are the unofficial estimates that circulate in the trading community, supposedly arrived at by people in the know. And Yahoo didn’t meet the whisper number, which was 20 cents a share.

What are these whisper numbers and where do they come from? They’re the rumoured profit estimates that circulate in Internet chat rooms, on trading desks, among brokers, insiders, and anyone else who thinks they know the state of a company’s financial position.

Increasingly, it’s the whisper number that companies have to match or beat to avoid a big hit in their stock prices, not the analysts’ consensus forecasts. You may ask why the analysts’ official forecasts are losing their primacy. Blame that on a system that tends to reward conservative forecasts.

Let’s look at where the official estimates come from. Each brokerage house employs analysts who specialize in covering stocks in a certain sector or industry. They’ll look at the sector as a whole, the company’s recent financial performance, and talk to key officials in the company about their sales, future plans, new products in development, inventories, market share and anything else that could affect the bottom line.

After doing this, the analyst will arrive at an estimate of how much money the company will have made (or lost) when it next reports its earnings.

First Call, a subsidiary of Canada’s Thomson Financial, is the biggest and most followed provider of analysts’ earnings estimates. The company tracks the estimates of dozens of major brokerage firms and ends up with a consensus figure—the average of what all the analysts have forecast about a company’s next earnings report. This used to be the only figure that counted. Until the whispers began.

The main reason analysts’ official forecasts have lost some of their cachet is that they’re frequently too conservative. A recent study found that almost two-thirds of U.S. companies beat analysts’ projections; just 12 per cent missed the forecasts. That’s not too surprising. Company officials don’t want to be too rosy in their discussions. So they’ll frequently be on the cautious side.

Analysts also seem more willing to err on the cautious side, especially since failing to meet their forecast will often spell disaster for the company’s stock price (at least in the short term). Later, when the company (surprise!) ends up beating the forecasts, the stock gets a lift, and everybody’s happy.

At least, that’s the way it always used to be. Now, investors have raised the bar (especially for tech companies). Now, it’s the whisper number that must be beaten (as shareholders in Yahoo found out this week).

How do you find out what a company’s whisper number is? The Internet has made it easier for rank-and-file investors to have access to the same rumour mill that the pros have had for years. There are now a number of websites that publish whisper numbers for thousands of companies (mainly American). Links to the three biggest whisper number providers are provided at the bottom of this article.

Just remember, these numbers are based on rumours. It doesn’t mean they’re somehow more accurate than the published estimates from the analysts.

But there’s no question that more investors want to know what the whisper talk is, if for no other reason that the investing world is listening—and reacting accordingly.