Trading based on earnings is a fool's game

Some investors brag on message boards about achieving great returns on earnings-based trades. That was just dumb luck.

By MSN Money Partner Jan 10, 2012 3:30PM

Image: Stock market (© Zurbar/age fotostock)By Thomas Kee, guest columnist

 

Thanks to Alcoa (AA), earnings season is off to a positive start. But I predict that this earnings season will still leave investors with lots of questions unanswered -- questions about future growth rates and current market multiples. 

 

In addition to Alcoa, I'm also looking for clues about the broader market's direction in results from Lennar (LEN), and JP Morgan Chase (JPM). In each case, I'll be looking to see if concerns about future growth come to the surface. I won't trade in these stocks, but I'll work the earnings news into my broader market thesis.  

 

I think betting on earnings results is a fool’s game. Even when results are good, stocks can fall, and when results are bad, stocks can rise. Speculating on stock moves after earnings are released is one of the riskiest propositions on The Street. I have not seen anyone find success doing it over long term periods of time.

 

This goes for options trading, too. People who put money into high-risk options right before earnings are also almost always paying a premium and therefore they are not getting a good deal in most cases.

 

Nonetheless, during this earnings season we will hear stories on the message boards from people who made a killing betting on one stock or the other. But remember, those are exactly that, bets. 

 

I think we all should avoid making new investments in stocks right before earnings. None of us are smart enough to predict the results for individual stocks on a consistent basis.

 

I operate strategies that do not rely on earnings results and recommend you avoid doing so as well. I use ETFs to make trades based on broad market trends and incorporate chart patterns in my decision-making. I favor a regimented approach with a measure of risk control and an exit strategy.This allows me to stay nimble and proactive -- I believe the only way to make money in this type of environment over time.

 

I suggest that we all take a step back. If you can avoid the pitfalls other investors experience, you are that much further along the path to success. Instead of swinging for the fences this earnings season, watch for broad trends about future earnings growth. I predict that after the dust settles, the theme will be a slower future growth rate for corporate earnings.

 

Thomas Kee is the president and CEO of Stock Traders Daily, the founder of The Investment Rate and the author of "Buy and Hold is Dead." He does not own any stocks mentioned.

Tags: AAJPMLEN
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