18 Oct Should I hold through earnings?
People who invest in the stock market fall into many different categories, but the overall theme is that we all want to make money and usually with as little risk as possible. Now risk is a relative thing, to some it may seem risky to miss out on a sure thing, to others it may mean investing in anything without a dividend. This is going to be written from what I think is the normal Canslim user, someone that wants to appreciate capital as fast as possible while assuming as little risk as possible.
You can sum this post up in one phrase:
“You cant get rich quick by blowing up your account”
So your favorite stock is coming up into earnings and you want to buy it because you “know” that its going to gap up and you dont want to miss out on the opportunity. So lets define opportunity for a minute.
What is opportunity? You can define it in a number of ways, as anything in the English language, some view opportunity as a divergence in your current path. So if you are working at a 9-5 for 20 years and your friend wants to start a business, you have an opportunity to go with them. This is a major divergence from your current path.
So lets go with this opportunity, we currently have a very stable job vs jumping ship and going for a much larger increase in income and we have done our research and decide to jump ship. So here we go! Well 2 weeks into this operation we find our friend isnt as business savvy as we thought and he doesnt have your office secured or your clients secured as he said he did. Well you just jumped into shark infested waters.
This is a great analogy for the stock market and earnings, it can swing both ways and there is literally no way to know which way your position is going go swing.
IBD says if you have a large gain in your stock and it is a leader and the market direction has not changed then you can probably stick with it, or you can reduce your position to safeguard against a bad report, or bad reaction to a good report because that happens too. Lets look closely at what IBD says:
- You have a large gain
- Your stock is a leader
- There is no change in market direction.
Each of these needs to be there, you have to have a gain, you have to own a leader and the market shouldnt be changing its stripes on you. Reason for all these is that if all things being equal your leading stock should lead earnings upward in a good market. If you are missing one of these then you should get out to conserve capital.
So lets look at the large quote above: You cant get rich quick by blowing up your account.
Those of you versed in math know that if you take a 20% hit through an earnings report it will take a 25% gain to break even on that position. So lets do that easy math $100 position is now worth $80. So you need $20 to get back to $100, 20/80 is .25….boom…math.
Its hard to get 25%, which is why IBD wants you to take profits at 20-25%. They never say take a 25% loss.
So a good bit of advice is to always know when your stocks earnings are coming out, if you are buying a stock ALWAYS know when their earnings are coming out. I have on a few occasions bought stocks that were doing good things with volume and I didnt realize that earnings were in the afternoon, and that cost me.
Should you hold through earnings?