Can You Handle a Need for Speed?

The folks at the Bespoke Investment Group recently listed "stocks with the greatest 1-day volatility on earnings reports." Here are some of those denizens, along with their average absolute one-day percentage change on the first trading day after their earnings releases:

You might assume this was all useful information. For example, if Blue Coat is so volatile after earnings, you could buy some shares right before it issues its quarterly report, then watch your investment quickly spike up 15% to 20% or so. Who wouldn't want that? There's a little problem, though. The stock could also move sharply down. After all, we generally don't know exactly what to expect when each company reports its quarterly results.

To counter that, you could perhaps throw yourself into researching some of these companies very closely. Then, if you're quite sure of positive upcoming news, you might buy. Still, this information is only telling you what you might expect on a single day. For all we know, these big pops might be followed by big drops over the following days. Should you just buy them for 24 to 48 hours? If so, let's face it -- you've become a speculator, not an investor.

Making matters worse, you'll end up with short-term gains at best. These are taxed at your ordinary income tax rate -- as high as 35%. Capital gains from holdings of more than a year will be taxed at just 15% for most people. That's a big difference. If you're lucky enough to make $25,000 in gains in a year, having them taxed as short-term gains will cost you an extra $5,000.

What to do
For many of us, the best thing to do with this list is ignore it. Focusing on volatility can get us into trouble. It's one reason many people stay away from lots of volatile-but-compelling companies. Consider, for example, a stock that tends to move up and down sharply in the short run, but over the long run has risen quite a lot. If you buy into this company aiming to hold for many years, patiently profiting from its growth, do you really care that it tends to go up and down a lot in the short run? 

Meanwhile, if you're attracted to stocks that seem to have rocket-like potential, consider checking out our Motley Fool Rule Breakers newsletter, which focuses on companies breaking old molds, with the potential for great rewards, along with greater-than-average risk. You can take a 30-day free trial of any of our newsletters.

Longtime Fool contributor Selena Maranjian owns shares of Netflix. She was recently startled to learn that a typical aorta is almost as thick as a garden hose. Netflix, Priceline.com, and Silicon Labs are Stock Advisor recommendations. The Motley Fool isFools writing for Fools.