Wednesday, 22 August 2012

How to avoid making bad decisions during reporting season

The US quarterly reporting season recently finished and Australian share market is right in the middle of it's end of year reporting season (Australian companies typically having a June year end).  Every day 5 - 10 major companies are reporting their results and as an investor it is hard to know what to keep up with and whether you should be trading based on new information that is being released.

Why reporting seasons bring added complexity to the investment process

For the most part, when you have invested in a company or are considering investing in a company you have done your research, you know what price the stock is worth and you know at what price you want to enter and exit at.  Big price movements therefore work to your advantage if you can be disciplined and stick to your original plan.

The hard thing about reporting season is that you have big price movements coupled with new information being released which adds much more complexity to the equation.  The price may now be at the point you originally wanted to buy or sell at but you have all this new information that you need to process to see whether you should be re-evaluating your buy / sell point decision.
  • For example if you own XYZ Stock and you had planned to sell it at $5 but at their result they announce massive new unexpected markets and sales and the stock shoots to $7, it is above your original sale price BUT given the new information you may only want to sell it at $8 and thus should hold off for longer
Because reporting season happens over such a short time period you are likely to get LOTS of information at once

The above situation is further complicated when you have a stock portfolio that contains multiple stocks.  For example my stock portfolio contains 14 different stocks, 11 of which report in the same 4 week period.  Many people have a much more diverse portfolio than I do.

Imagine the situation with XYZ stock being repeated for every stock in your portfolio and you will see why many investors suffer information overload during reporting season and make bad decisions as a result.

Setting a set of rules for yourself is key to making good decisions (and remaining sane)

You need to set rules for yourself during reporting season.  I use the rules I have listed below to process all the information and make sure I am making the right decisions:
  1. Unless the company is blowing up (i.e. going to go bankrupt or lose more than 20% of it's value) do not make any decisions during reporting season
  2. Deal with the bad news first and the good news last
    • Big good news stories are likely to lead to sustained changes in the price of the stock - if you are looking to sell out of it, the price is likely to remain high so you are not in any rush
    • With bad news stories you need to assess how bad it actually is. 
      • Often the market will be over reacting which will give you a chance to buy cheap during the period it is over-reacting
      • However if you think the market has not realised the extent to which some news will affect the business then you have an opportunity to react quicker
  3. Investments almost never need to be made today
    • A good investment today is often a good investment tomorrow and into the future so rushing decisions is almost prudent course of action
Do you have any other rules that you use to get yourself through reporting season?  Do you keep close track of your companies financials or do you prefer to set and forget? 

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