Leave your emotional baggage behind

February 5, 2007 2:56 pm

We all know that emotions are really important when it comes to investing BUT: what it was going on lately is rather ridiculous. Sure, earning season has been a bit choppy as companies have been coming out with excellent numbers (looking backwards) and below estimated numbers (looking forward); But we need to realize that much of this has been anticipated previously. The problem lies in the fact that much of the information that is distributed by publicly traded companies they still hard to understand even in the face of the transparency rules set forth by Regulation FD.

And what about Sarbanes Oxley? Isn’t it amazing how the requirements for full disclosure and shareholder protection have collided and essentially allowed for companies to continue to hide expenses and provide for extraordinary levels of compensation for their key executives? Why, in the name of Pete have we allowed for the bureaucracy to contaminate the free market system?

The name that comes to mind is Enron.

Yet at the same time we have to still wonder about Regulation FD

that the potential for the mistakes that were made by conniving executives in companies that were allowed to hide behind convoluted and complex balance sheets could still happen. It seems that this is much of the concern of investors each and every time new earnings release is announced. Just take as an example last week’s Google announcement. As soon as the news came out Google shares plummeted over $25.00 per share. Both in number and in percentage we can agree that was a very substantial amount. Moments later, the stock moved up over $10.00 and continued to climb for much of the after-hours session. Fast forward until the next morning and we found the Google was trading at about $520 per share up about $10.00 from the previous day. What information was different in the overnight session and in the regular session the following day?

It would only be logical to assume that something substantial was released during the conference call the preceding night (yet it wasn’t).What happened is what has been happening over and over again all of the past several years with regard to earnings expectations.The adage of : by the rumor and sell the news, has been rearing its ugly head again and causing many investors to spook once information has been released. Coupled with the fact that overnight trading has become more and more mainstream, we’re finding that earnings releases are a haven for the extremely aggressive investor looking to make a move in a less liquid market environment.While this does hold promise of riches for many; the fact is that due to the wide range of fluctuations seen during the extended sessions, is only suitable for those with a very solid constitution.Volatility within markets has been increasing all the last several months as the Dow has reached higher highs on a weekly basis.

While the NASDAQ still remains the laggard within major industry groups, it is clear that there is no end in sight to the volatility that has been plaguing the markets of late. It would be better to look for companies that have modest earnings surprises coupled with consistent earnings growth in a market such as this that that punishes a stock far beyond that the necessary amount for even the smallest miss.Moving forward, unless emotions are put to the sideline, will continue to see this kind of volatility during earning season , only to abate as we draw to the quarter’s end. Don’t be fooled by the intermittent noise that is cause by the variations in stock prices if you’re planning on buying and holding a stock with a definitive target based on fundamentals. This market is a traders place today, well marked technically for them and a fundamental market for investors. Right now, more than ever, investors need to stick to their principles and disciplines on a fundamental basis and filter out all the noise produced by earnings announcements and corporate guidance. Much of this is still inconsistent and not able to be realistically compared since there is no standardization provided that can be used as a definitive tool of assessment.

It would probably be best to say that if it’s too hot in the kitchen these days, maybe you shouldn’t be cooking.

Take that as a slice of advice to be more heavily allocated toward a diversified mutual fund rather than a small a position of stocks if you cannot handle the daily, weekly or even monthly volatility. For the time being, this is going to be the norm and even though the longer term made hold significant benefit the short term ride is going to be bumpy.Take a look at chapter 2 of The Disciplined Investor which gives you an excellent vantage point to look at these markets from a technical standpoint and to help you be left emotional when it comes to your investments.These are the rules of engagement for the time being:

    no emotion
    noise filtering
    sticking to fundamentals

Good look with your investing!

Andrew Horowitz

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