To The Moon

Every earnings season brings the same question for investors: should we hold our shares through the announcement, sell before the results come out, or keep cash ready and wait for a better opportunity?

It sounds like a simple decision, but it can be one of the most difficult parts of investing.

A company can report record revenue, beat analysts’ estimates and announce strong profit growth, yet its share price can still fall sharply the next morning. At the same time, a company that misses expectations may surprise investors with a positive outlook and see its shares rise.

Why does this happen?

Because the stock market does not simply reward companies for reporting good results. It reacts to the difference between what investors expected and what the company actually delivered.

A company might be performing well, but if its share price has already increased significantly in anticipation of excellent results, there may be very little room for disappointment. Even a small weakness in guidance can trigger profit-taking.

This is why I believe having a plan before earnings is more important than trying to predict whether the share price will go up or down.

1. Holding through earnings: Think beyond the next trading day

For long-term investors, holding through earnings can make sense when the original investment reasons remain intact.

If a company has a strong competitive advantage, healthy cash flow, manageable debt and a business model that can continue growing over several years, one quarterly announcement should not necessarily change the investment decision.

There is a difference between a temporary share-price decline and a genuine deterioration in the business.

For example, a company might experience weaker quarterly sales because customers delayed purchases or because of seasonal factors. That does not automatically mean its long-term prospects have changed.

However, investors should not use the long-term investment argument to ignore warning signs.

If revenue growth is slowing consistently, margins are shrinking, competitors are gaining market share or management repeatedly lowers its guidance, it may be time to reconsider the investment.

Holding should be based on confidence in the business, not simply an unwillingness to accept a loss.

2. Selling before earnings: Sometimes protecting gains makes sense

One thing investors often underestimate is how quickly unrealised profits can disappear.

Imagine buying a stock at $50 and watching it climb to $80 before its earnings announcement. That is a 60% gain.

The company has performed well, and expectations are high. However, if the stock falls 15% after earnings, a significant amount of that gain disappears in a single trading session.

Would it have been unreasonable to sell part of the position beforehand?

I don’t think so.

Taking some profits does not mean losing confidence in the company. It can simply be a way to reduce exposure while keeping some shares for future growth.

I also think position size matters. If one stock has grown to become a large percentage of a portfolio, an earnings announcement can create more risk than the investor originally intended.

Reducing a position before an event may help bring that exposure back to a comfortable level.

The important point is not to sell everything automatically. It is to consider whether the potential reward is still worth the risk.

3. Keeping cash: Don’t feel pressured to buy every dip

Cash is sometimes viewed negatively during a strong bull market because it does not generate the same returns as rising shares.

However, cash also provides flexibility.

When earnings disappoint and a stock drops sharply, investors with available cash have the option to examine the situation without needing to sell another investment first.

But there is an important distinction between a buying opportunity and a falling stock that deserves a lower valuation.

A 10% decline does not automatically make a stock cheap. If the company has reduced its earnings outlook, lost an important customer or faces a structural decline in demand, the lower price may be justified.

Before buying a dip, I would want to understand:

• Was the decline caused by short-term market sentiment or weaker business fundamentals?

• Has management changed its full-year outlook?

• Are profit margins and cash flow still healthy?

• Is the company losing its competitive advantage?

• Does the new share price offer a reasonable valuation compared with its future earnings potential?

I would rather miss the first part of a rebound than rush into a position without understanding why the stock fell.

4. Look beyond earnings per share

Another common mistake is focusing too heavily on whether a company beats or misses earnings estimates.

Earnings per share is important, but it is only one part of the picture.

Depending on the industry, I would also examine several other areas.

Revenue growth: Is the company still attracting customers and expanding its business, or is growth beginning to slow?

Operating margins: Is the company becoming more efficient, or are rising costs putting pressure on profitability?

Free cash flow: Is the business generating real cash, or is reported profit not translating into cash generation?

Debt levels: Does the company have enough financial flexibility to manage higher interest costs or weaker economic conditions?

Forward guidance: What does management expect over the next quarter and full financial year?

Management commentary: Are executives confident about future demand, or are they highlighting new challenges and uncertainties?

Sometimes the most important information comes from the management discussion rather than the headline earnings figures.

A company can deliver an excellent quarter but still disappoint investors if its future outlook is weaker than expected.

5. Watch how the wider market is behaving

Earnings do not happen in isolation.

The broader market environment can have a significant influence on how individual stocks react.

For example, when interest rates are expected to remain higher for longer, investors may become less willing to pay high valuations for companies whose profits are expected far into the future.

When economic uncertainty increases, even companies with solid results can experience selling pressure as investors reduce overall market exposure.

Sector sentiment also matters. If several companies in the same industry have reported weaker demand, one company’s earnings may be judged more cautiously.

This is particularly important during periods when market valuations are already elevated.

A company can do everything reasonably well and still see its share price fall because investors are adjusting their expectations across the entire sector.

That is why I would look at both the individual company’s performance and the broader market conditions before making an earnings decision.

6. Avoid making decisions based on emotions

Perhaps the biggest challenge during earnings season is controlling emotions.

When a stock has risen for several weeks, investors may become overly confident and assume the rally will continue.

When it falls sharply, fear can lead to selling at the worst possible moment.

There is also the temptation to buy more simply because the price is lower than yesterday.

I think all three reactions can lead to poor decisions.

Before an earnings announcement, I would ask myself three questions:

1. If I did not already own this stock, would I buy it at today’s price?

2. If the share price dropped 15% tomorrow, would I still be comfortable holding it?

3. Has anything changed in the company’s fundamentals, or am I reacting only to short-term price movements?

These questions help separate investment decisions from emotional reactions.

So, what would I do during earnings season?

My preference is not to follow one fixed rule for every stock.

For a quality company with a strong long-term outlook, I am more comfortable holding through normal earnings volatility.

For a stock that has experienced a significant rally and is trading at a valuation that leaves little room for disappointment, I would consider taking some profits.

For companies where the outlook is uncertain, I would rather wait for the results and management guidance before committing more money.

I also believe investors should avoid putting too much of their portfolio into one earnings event. Even if a company has a strong track record, unexpected news can happen.

Most importantly, I don’t think every earnings announcement requires an action. Sometimes holding, selling or buying can all be reasonable decisions depending on the investment, valuation and individual risk tolerance.

The goal is not to get every earnings reaction right. Nobody can consistently predict how the market will respond to every announcement.

The goal is to build a portfolio that can withstand unexpected results without forcing us into emotional decisions.

My takeaway: Hold when the long-term investment case remains strong, take profits when risk becomes uncomfortable, and keep cash available when opportunities arise. Don’t confuse a good company with a stock that is worth buying at any price.

Earnings season is not just a test of company performance. It is also a test of our own investment discipline.

For discussion purposes only. Not financial advice.