Don't Be a Patsy

There is an old poker proverb that has been quoted by everyone from Warren Buffett and Marty to Whitman to Amarillo Slim and Whispering Saul that applies to trading around earnings season. If you have been at the table for a few minutes and have not yet figured out who the patsy is get up and leave. You are the patsy in the game. Every earnings season we see dewy eyed traders rushing out to beat the market and pile up a fat stack of profits trading stocks and options based in earnings s reports. Everyone thinks the game is winnable and there will be boasts of great winners and successful trades over the next six weeks or so. You will not hear much discussion of the losers but then again you will probably never meet a losing poker player in your lifetime either. The odds are stacked against you in a very big way especially if you are using options to make your bets. Stop to consider for moments exactly what you are trading in earnings season. You are making a bet on your guess on how much the Wall Street analyst's community guess was off in either direction. If by some deductive miracle you get that right you have to also be right about how the stock is going to react to the failed guess. Finally you have to be right about which option you picked and how much you paid for the contracts in order for the whole deal to work out in your favor. The traders who set the markets in options are waiting for all of the new and chronically unsuccessful traders to hit the market over the next few weeks. You will be paying for their vacations, second homes and new rides once again this quarter. They have super computers fired up and ready to go to exploit your wrong way bets and will have priced their bids and offers to pretty much ensure you cannot make money. A few individuals will get lucky and strike gold in one of their bets on a guess but most will donate to the house. Those who do get lucky will think they have learned the secret of trading and are pretty much guaranteed to give it all back plus a bunch in the future. Stock traders will not fare much better. The biggest reasons for individual investors chronic underperformance is over trading and chasing hot stocks. This is the exact activity that is encouraged by focus on earnings reports that cover a three month snapshot in the life of a corporation. Investors are going to jump all over companies that exceed analysts' estimates and sell those that fall short. The pattern has been repeated every quarter for as long as the reports have been instantly available via newswires and the silliness has just increased with the expansion of the instant communication we now enjoy. Focusing on the every short term results leads investors to buy high and sell low which is pretty much the reverse of the age old formula for market success. A more sensible approach to earning season is to take a business like view and make all the craziness work for you. If one of your portfolio holdings reports a sparkling quarter and investors pile into the stock and drive it to unreasonable valuations, sell the stock to this new pool of enthusiastic buyers. If a quality company falls short of expectations put yourself in a position to take some bargain priced shares off the hands of newly despondent traders. Rather than trying to make predictions about guesses be ready to react by selling over priced merchandise and buying a fresh inventory of attractive assets on the cheap. Everyone and their cousin, who knows a guy that is big at Giant Brokers Inc., is going to have earnings related trades and opportunities for you to consider over the next few weeks. The very small handful of people who have the computing power and capital to clean up during earnings season are not saying a word. When you sit down at a table with a pack of rocket scientists , grizzled old floor traders and funds with huge pools of capital available to push stocks where they want them to go you have already lost. Your best bet as an investor is to get up from the table and look to exploit the inevitable excessive mistakes of earning season by going against the crowd and try buying low and selling high for a change