Stock Lesson VI

It’s the earning season again. Many companies already came out with their 2006 Q3 (July to Sept) earnings. Some are good (Apple, eBay and Google), some are bad (Intel, Motorola and Yahoo). Some people are happy because they bought Google before the earning; some people are not because they bought Yahoo…

I don’t know why people want to bet on the earnings. But I played exactly this earning game when I was new to stock market. And the results is not pleasing at all. Betting on earning is pretty much like “guess the coin toss” because we as outsiders don’t have any edge. But for those brave hearts who really can not resist the excitement, here is my lessons and suggestions:

1) Don’t short a hot stock like Apple or Google. I thought about this idea early this year, but I gave up this stupid idea lately. The reason being they usually come up with a blockbuster number just when you think they peaked. Don’t fight against the market.

2) When the expectation is high, be careful. I bought NTES, PALM and RHAT before its earning when the wall street expects a blow out number. That did not come true and I was burned. By the same token, be careful when a leader in sector did not do well. Because that may signal the slowdown of the sector. Don’t think the “follower” will eat the market share from the leader. I made this mistake when I bought the 9City (NCTY) after Netease missed the estimate. The 9City did OK with their WOW game, but its stock went down after the report. So I got burned twice.

3) If the company anounces the earning after market closing, sometimes you can look for clues of earning. If the stock goes down in the afternoon, there may be some leaks and the earning may not be good. This turns out to be true for NTES and another stock Best Buy (BBY) last winter. So get out while you can.

4) Last but not least, when the earning is not as good as expected, we still need to ask this question: is this a fundamental shift or just a temporary problem? If it’s just a temp thing, and we have the patience, we should hold them. This turns out to be true for NTES and BBY.     

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