Earnings season starts anew this week and soon we will be buried in quarterly reports on the operations and finances of publicly traded companies.
It is time to break out all our watch lists and compare the estimates to recent results and track which companies have been posting positive and earnings surprises.
Investors should be looking to see which stocks have been getting upgrades and estimate increases or downgrades and lowered estimates.
Investors have to make sure that in the few hours a day left after working professions all day that they can make mad, crazy earnings-related trades and make big stacks of cash trading earning season.
After all, that is what the pros are doing, right?
Let The Buyer Beware
Unfortunately for individual traders who insist on attempting to trade around earnings season, the real pros are busy pricing their options book in such a way as to transfer as much of your money to their account balance during the next month as humanely possible. The option traders and market makers are especially excited about the return of frenetic earnings related trading activity after a couple months of low volatility. They need this quick burst of earnings season follies to pay for that extended August vacation they have planned.
The simple truth of earnings season is that your odds of gaining spectacular trading success by making bets on someone else's guess are pretty slim.
There are some very good options traders who will do well over the next month. They work about 15 hours a day and are well-versed in higher math and statistics. They know how to price that straddle just right so that the trade may come oh-so-close, but the end result will be your money in their account. Great traders are like great baseball players. Everyone wants to be one, but few have the ability to actually achieve that dream.
Know Your Limits
If you are not a professional trader with the ability to focus all day, every day on the markets, you probably will not be a successful trader -- especially when things are moving as fast as they do in the madness of earnings season.
Whether it is stocks or options trading, one mistake or bad bet on the analysts' guess can wipe out any gains you might have achieved previously. The odds of glancing over charts for an hour or two at night and making piles of money are about the same as you hitting a Clayton Kershaw curve ball out of Chavez Ravine. It might happen, but a smart person wouldn't bet it that way.
There is a way for individuals to make a ton of money off of earnings season. Ben Graham once described his hypothetical business partner Mr. Market. He is a moody fellow who at times is too excited about the future and thinks everything will be rosy and trees will grow to the moon. When he is that frame of mind, he over values the business and it makes sense to sell some of your interest in the company.
At other times, he is down in the dumps and very pessimistic about the future and is pretty sure we are all doomed. When he is in that frame of mind, he undervalues the business and is willing to sell you his interest at a ridiculously low price. It just makes sense to buy from him when he is overly gloomy.
The Market's Mood Swings Will Get Worse During Earnings Season
When a particular company posts results that exceed the analysts guesses, Mr. Market is going to get way too excited and build the stock up to unreasonable levels. If you are fortunate enough to have shares of one these 'upside positive reactions,' be a seller.
The real opportunity in earnings season comes when a company does not do as well as Wall Street had hoped. When this happens, Mr. Market is going to sometimes get downright depressed and be willing to sell a nice collection of assets at huge discounts because of short-term results. When this happens, investors should be willing to step in and take advantage of the bargains that are created.
Investors do not have to be a trader to profit from earnings season. Make Mr. Market your best friend and focus on bargain creation. Use this silly season to buy solid companies at temporarily depressed prices that you can own for the long-term and rack up huge profits when conditions inevitably improve.
The industry continues to present opportunities for value-investors who can weed through the daily noise of the market. Learn about Banking’s Top “Insider Secret”, known as the Great Bank Reduction.
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