5 Tips for Smart Investing in Earnings Season

Today’s message is for investors who want to buy just ahead and just after company earnings reports. This is a common investing strategy because earnings reports are often major catalysts for stock price movement, both to the upside and the downside.
I offer a couple of simple suggestions for investors who want to use earnings reports to their advantage.
First, and this one should be obvious: do your research. Any gunslinger with a trading account can buy a stock that is trading higher into earnings. Don’t believe that just because a stock is rising into earnings that the earnings report will be good.
You need to have some ideas of where a stock should be trading based on your analysis of known information, and your assumptions of unknown information. Armed with these two weapons you’ll actually be making an informed decision, and you’ll know if you’re getting a good value on your investment.
Second, based on how sure you are of your analysis, buy a percentage of the total number of shares you want to own. If you’re convinced you’ve uncovered something the market is totally missing, go all in. If you’re 50% sure in your analysis, then take half a position. You can add to these positions after earnings depending on how right you were.
Third, let the potential opportunity guide the dollar amount you invest. If you think the potential upside or downside is 5% to 10%, a larger investment may be suitable because of lower risk. But if the perceived potential move is 20% or more, a smaller dollar amount invested is wise.
Fourth, remember that you care where a stock is going, not where it’s been. This is where your analysis comes in again. Just because a stock has gone up 100% in the year before you uncovered it doesn’t mean it can’t rise hundreds of percentage points more in subsequent years.
Finally, don’t buy every stock you want to ahead of earnings. Try one or two, and watch the others you’ve considered. You’ll learn more, and have more fun. Both will help your odds of investing success.
There is a lot more to say on the subject of buying stocks during earnings season, but these suggestions hit the major points. Just remember not to get sucked into the excitement. The market doesn’t know that you own the stock, and it doesn’t care.

Silicon Valley’s Dirty Little Secret

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