In my younger days, I was fascinated by the idea of trading during earnings season. The allure of potential one-day gains of 20% or more tempted me. I thought that if I did enough research, analyzed Wall Street's expectations, and thoroughly studied a company's performance, I could make calculated bets on whether that company would beat expectations, leading to a sharp rise in its stock price.
Well, I was wrong.
I quickly learned that a company can beat estimates, but because it misses the "whisper" number, its stock can still drop. I also learned that a company can utterly smash all expectations, but issue conservative future guidance, and its stock can still drop. Even better, a company can absolutely destroy analysts' estimates, issue guidance above Wall Street consensus, and -- you guessed it -- its stock can still drop.
Shorting or buying puts on a terrible company because you assume its stock will plummet after it reports earnings would be another mistake. I've seen just-let-me-die-already companies report horrible numbers and then watched their share prices skyrocket. How can this be, you ask? It's because the earnings reported were slightly less horrible than what Wall Street expected.
Of course, there were also those times when I was just flat-out wrong.
So what is the point of all this?
Well, we're entering earnings season, Fools. And I'm trying to save you a lot of money as well as protect you from a lot of frustration, indigestion, and I-want-to-throw-my-computer-out-the-window moments.
It reminds me of the 1983 movie War Games starring Matthew Broderick, in which a confused military central computer almost starts World War III. Ultimately, the computer realizes that no one wins during a nuclear war. The only way to win, it determines, is not to play.
And that, Fools, is my point. Don't play the earnings guessing game. The odds are severely stacked against you. And, even if you're right, chances are you'll still lose.
What should you do? Keep investing in a diversified portfolio of great companies such as Apple (Nasdaq: AAPL ) -- which I recommended in my Rising Star Portfolio -- or dividend stalwarts like McDonald's (NYSE: MCD ) and Intel (Nasdaq: INTC ) -- two companies that James Early and I recommended to members of the Motley Fool's Income Investor service. Mix in some top-tier small- and mid-cap companies like Boston Beer (NYSE: SAM ) and Panera (Nasdaq: PNRA ) -- two companies that I have on my watchlist -- and buy these companies when they are trading at attractive prices. Live within your means so you can save more, and use those savings to add to your portfolio on a regular basis. If that sounds like what we have been saying here at The Motley Fool for years, well, you're right. And guess what -- it works!
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