This is an update of a post from 3/22/13.
One of the most frequently asked questions I receive is if I will be holding a position through earnings. My answer is always the same, without hesitation ‘Yes.’
The first thought that enters my head when someone asks why I hold through earnings is “Why wouldn’t I hold through earnings?”, so let’s try and see why I feel that way, because it suggests I see it as an opportunity, but I never consider I’m playing earnings.
It’s definitely an area where people seem to have strong views, and some get very hot under the collar about it. It’s obviously seen as a volatility event, moreover, it’s a scheduled one, so to knowingly venture into it is somehow seen as irresponsible, why would you willingly expose yourself to it?
In a similar vein to earnings announcements, I remember a few years back when trading currency markets, people would try to tell me if you’re holding EUR into an ECB announcement, or GBP into a UK inflation number you were gambling and being reckless.
I just don’t see that at all, because once you start with that line of reasoning where do you stop? Am I to take all my positions off ahead of a Fed announcement, or a payrolls number? What about Wholesale Inventories? No, not important enough?
If I’m long a semi equipment stock should I not only take the position off when it reports, but also when $INTC reports? If I’m long $MA do I take it off when $V reports? Seriously, where does it end? Continue down that route and eventually you get to the point where you shouldn’t have any position on, ever, because anything can happen, at any time. Or as one of the readers of my original post in March commented “Taken to the logical extreme, you should never invest in stocks because it’s basically one massive string of volatility events.”
And that’s what it boils down to. There’s a name for that, it’s called risk.
How you perceive that risk should be commensurate with your timeframe. If you’re typically a daytrader and choose to hold something overnight for the earnings announcement, then the volatility relative to your timeframe is far greater for you than for a trend follower.
I cut my losers and let my winners run, so I’m aiming to hold positions for very long periods. The longer I hold it, the bigger a winner it must have been. By the time I’m closing my biggest winners, earnings will be a distant memory, hopefully several of them would have come and gone, and with hindsight barely noticeable on the chart.
As a trend follower my upside is limitless. The implications of that are all your ideas are not 2:1 or 3:1 risk/reward, they are potentially 10:1, 20:1, 100:1. I have no problem with a stop 10% or more away if the setup suggests it could run higher many multiples of that. My price target for every position is infinity.
Let’s look at some examples:
We took a long position just days before it was due to report, and we held it through the next one as well, the result of which was a selloff that invalidated the uptrend. Out with 42% gain. Thanks. We’re back in it now and will happily hold it through earnings for a third time. We’re just following price trends, earnings are incidental.
Green Mountain Coffee ($GMCR)
Heavily shorted stock, supposedly only went up on short-covering, smart people don’t like it, overbought, earnings beat priced in, blah, blah, blah, kaboom. All we saw was an uptrend and we held on. Just invalidated this week.
Whole Foods ($WFM)
Here’s one that didn’t work out. Positioned for more upside. February earnings disappointed, stop triggered. No problem, we’re out. We move on to the next one. We never quite got a signal to re-enter either which was a pity, because the next earnings move was favorable and it never looked back.
Understand, we are not playing earnings or gambling by holding positions into an earnings announcement, we are playing trends, and as long as we have predefined risk/reward parameters for every position, then earnings are just a catalyst to potentially test them.
Every day brings the possibility those parameters will be tested. Earnings just make it more likely.