My investing muse - Should we trade before the earnings?
We do not have "sufficient" information about earnings - revenue, EPS, net profit and market outlook. We are unable to anticipate how the market will treat the news. It is important that we recognise the above. As an investor, it is my due diligence to get as much information as I can.
With this, I find it challenging to predict how the stock price will move even if we are hopeful of favourable earnings. Hope is not a strategy. Given the current macro environment, the risk-reward to go long for companies leans towards disadvantageous.
“Fortune favours the Brave” is a quote that many have come to know. It has some validity but I would like for us to consider the following instead:
“Fortune can favour the Brave but failure awaits the Fools.”
I love the above quote from Mr Neil DeGrasse Tyson.
Over time, it is natural to develop confidence having enjoyed some success, career advancement and recognition. It is good to have self-confidence and live with good self-esteem. However, let us not get ahead of ourselves following some “success”. A track record is no guarantee for future success. “I can be wrong” is such a humbling revelation for me. While we feed our confidence with track records, we should not be living our lives constantly looking in the rearview mirror. Let us avoid being myopic, having tunnel vision and in some cases, deluded as we use our past victories as side blinders.
Being the best yesterday means that we need to work even harder to be the best today.
In an echo chamber, we could set ourselves up to narrow our views and taint our objectivity. I get concerned when we display (passive) aggression towards contrary views.
Progress is made through a diversity of views. I get uneasy when our reality loses objectivity. Thus, it is good to listen to all sides - bulls, bears or some Beatles in between.
Back to Trading
Coming from a position where “I do not know enough”, I could not make a “calculated” decision before earnings. My confidence needs to come from research instead of hope that the company would deliver.
Thus, I seldom take up position before earnings unless the price is with an adequate margin of safety. Taking up a position without adequate research on the company (to me) feels like gambling. There are better ways to “use or spend” our hard earned money. While I may not have complete information, I seek to have as much information as possible so that I am taking on lesser risks.
The first rule of investing is not to lose money.
Coming to risk/reward, each one of us would have different tolerance. What works for me do not work for another as we have different work experience, learning, investing time horizon, different goals for investing and different expectations coming to risk-reward.
If I were to take up a position, I prefer to do so AFTER the earnings. My profit can be lesser but my risks is lesser too, after I have researched on the company. To see the worth of any business, we need to see value creation & financial statements over a longer period of time. One quarter does not define a company but a track record of years would give me much confidence. In such good businesses, there is room for upside and the strong fundamentals would ensure better chance of survival during market downturns.
Let us do our due diligence before we invest.
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