Earnings season gets started later this month and that means there will be a daily parade of companies releasing figures on how well they did last quarter. Most of those companies will also give future guidance for next quarter and that is often the news that moves stocks the most.
Why do companies choose to give guidance, even though it is not a requirement? Most do it as a way to show transparency and develop a better relationship with investors. Giving guidance is a way of saying “hey, we’re not keeping anything secret from you and this is what we see happening next”.
Do You Have A Short Term Mentality?
The problem is that everything now days is set up for the short term mentality that dominates investor’s minds.
1) The Internet and online discount brokers ushered in the ability for anyone to cheaply buy and sell stocks without even picking up the phone. Its so easy and cheap to trade that its hard not to be a short term holder of stocks.
2) Online brokers promote frequent trading as that is the way they make the bulk of their money. Buy and hold is out, short term thinking and trading is in.
3) Television and other media pundits pound the pavement daily with news that makes you want to get in or out of specific stocks. They also make it sound like you should be actively managing your money. And by “actively” I mean being active on trading.
4) Earnings periods like we are about to embark on are great catalysts for short term thinking. Companies rarely talk about their long term plans a year or more down the road. They focus on what investors really want to hear: what will happen next quarter.
Earnings Season Means Volatility Goes Up
Four times a year trading volatility is guaranteed to go up. It happens during each quarterly earnings season when investors feel compelled to buy and sell certain stocks based solely on the news they hear. While some of that news may contain new information that is valuable to investors, most of it will be short term in nature and not address any long term plans the companies have.
For someone with a long term time horizon, earnings calls are of interest but rarely something that should be acted upon. For short term investors though, that same news often means they need to buy or sell right now! Its hard for many investors to resist the urge to take action.
Buy And Hold Is Less Stressful And Does Work
Long term investing time horizons have long been thought of to be the best way to make money in the stock market. Buy stock in a good company, monitor events periodically, and three, five, or ten years down the road the stock will probably be higher. Yes it will have gone up and down in between but the end result will often be that it is higher.
A short term mentality means you always have to be on the edge of your seat, ready to change your thinking based on the news of the day. It means you feel compelled to be doing something (trading) and are more likely to make knee jerk decisions which turn out to be wrong in the long run. Being on constant alert opens you up to making mistakes that you wouldn’t make if you weren’t so convinced by everyone around you that you need to take frequent action.
Earnings season is the stock market’s report card time and it is both fun and stressful. But for investors who invest with a long time horizon in mind, its become increasingly hard not to jump on the bandwagon and not to participate in the knee jerk reactions all around them.