Mark Mahorney explains why most amateur investors are in over there head they try to time trades, especially during earnings season.
(PRWEB) January 12, 2005 -- BlogginWallStreet - Day to day during the 'earnings season' the markets will move on the results of particular leading companies, the Nasdaq being influenced by the big techs and the Dow moving with the blue chips. Longer term the markets will move based on a more overall feel for how companies are doing. There's no formula for this, but as the numbers come out one by one optimism or pessimism build up. Sometimes this feeling for how businesses are doing shift gears mid earnings season. This happens when a major company comes out early and sets a tone that turns out not to be reflective of the results of other companies reporting later.
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Average Joe investors shouldn't get caught up in the day to day fluctuations, aberrations, and betting on the results of a single company. Sensible exceptions may exist in the case where a person is exceptionally familiar with a particular company. It is quite common for the media and the general public to misinterpret information in the short term.
However, if there is overwhelming negativity throughout the markets it may be the case that investors won't care to see how great your company really is. In the case of a recession or market evacuation even excellent profitable companies may fall.
Also, try to be aware of any emotional nearsighted attachment you may have to the company. Far too many people have far too much of their money tied up in the companies they work for. It's especially hard to see how people could do this willingly given the lack of loyalty companies are showing toward their employees in the current business environment.
Outside of these exceptions I caution the general investor to mind their own business and stay out of the game of gaming the market fluctuations created by earnings reports. Far, far too many speculators are all out there trying to out guess each other. The end result is a choppy chaotic market place that is reactive both before and after earnings releases. The movements are for the most part not sensible or predictable for the average investor.
What about for the not-so-average investor? Well, first you'd better realize who this is and who this isn't. It isn't you or I. It isn't individuals with special powers of precognition. It isn't Buffett following value investors. And it isn't CFAs or CPAs trained in calculating corporate value. It IS hedge funds and teams of top notch scientists and computer programmers building systems to identify any points in the market where there is the slightest probability that the markets will act predictably. And while they may have a great deal more overhead in the back office, they make up for this by being able to capitalize on many more trades than the individual and by being able to trade at a much lower cost than the individual.
I've personally seen these programs in action and have friends who work for these outfits. And they wouldn't appreciate me telling you too much about it, because their profits are derived in large part from the gambling mentality of the general public. They are like a person cheating in a poker game, only it's not cheating. They have a consistent edge and being nearly a zero-sum game their edge is your loss, as it has been mine in the past.
But you won't read a single negative word from me regarding these groups of well-educated and well-heeled speculators. I have tremendous admiration for them and say more power to them. They run their operations as professional businesses, as most of you would do if you were to engage in any other business venture.
So word to the wanna-be-wise, unless you are well versed in statistics and probabilities and able to ferret out high probability events, stay away from pattern recognition trading strategies. Furthermore, if your trading on earnings reports and any of what I've written above is unfamiliar to you then you should take that as a clue that you are probably in over your head.
For the full story please direct your browser to http://www.blogginwallstreet.com/2005/01/earnings-season-basics.html
For More Information Please Contact: Eric Levitt, elevitt@blogginwallstreet.com 917-449-1333
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