The Result is Bad... What do you Do?

[Lizard]

Okay, so it's that time again - some good surprises, some bad surprises and some plodders. Sometimes the market warns you in advance, sometimes it gets it wrong...

So, anyway, you've got your handful of hopefuls, you're watching the results rolling in and KADOONK, in comes one you're not too happy about. What do you do?

To me, choosing when to trade out of a surprise is one of the hardest decisions to make - no matter what I try - especially on illiquid stocks.

[Corporate]

Don't like it - don't own it.


What stock?

[shasta]

Okay, so it's that time again - some good surprises, some bad surprises and some plodders. Sometimes the market warns you in advance, sometimes it gets it wrong...

So, anyway, you've got your handful of hopefuls, you're watching the results rolling in and KADOONK, in comes one you're not too happy about. What do you do?

To me, choosing when to trade out of a surprise is one of the hardest decisions to make - no matter what I try - especially on illiquid stocks.

Depending on the size of the company, usually bad news is factored in well before the result (as is good news).

For a total out of the blue event, i'd ditch ASAP, but interestingly unless your using intraday data, when would TA kick you out? (At the close of play/first thing next morning?)

If you have a "buy & hold" strategy, i'd assume you would sell only if the fundamentals had changed.

If we took say RBD, the likes of Snoopy may well use this opportunity to top up?

I guess for you Lizard, would you buy into the company at that stage, if not it's probably a sell?

[STRAT]

More info please Liz

[h2so4]

I'd forgive any company that chucks out 1 bad result,thats business, but when they start pilling up over a period of time it might be time to reassess the situation. Go make money where there is better value. Ill liquid stocks??(a bit sick you mean, poor things). Well anything can happen with those. They might die.:)

[Halebop]

Liz I'd have a bias towards getting out but there are so many conditions attached it might be meaningless. A big for instance is that If the market was expecting it, the hiccup might already be priced. I've done some good buying in the past on hiccups though - a big part of my formula is looking for fallen angels during reporting season. But if it is in any way an also-ran, don't kid yourself that it's an angel in dress up! Also-rans always shed their wings.

[Lizard]

Thanks for the comments - especially Halebop and AA... I find it really hard to make rapid decisions in these kind of circumstances and am almost never happy with the outcome. Had one yesterday and wasted hours refreshing the depth and placing offers which didn't get hit...

I'm much more ruthless these days, but, even so, can waste too much time and energy on agonising over exit timing. Was interested to see if other, more frequent traders, had a simple strategy to avoid the indecision and emotion!

[STRAT]

Thanks for the comments - especially Halebop and AA... I find it really hard to make rapid decisions in these kind of circumstances and am almost never happy with the outcome. Had one yesterday and wasted hours refreshing the depth and placing offers which didn't get hit...

I'm much more ruthless these days, but, even so, can waste too much time and energy on agonising over exit timing. Was interested to see if other, more frequent traders, had a simple strategy to avoid the indecision and emotion!Hi Liz, I like to sell into and before news hits the news stand but in this situation my approach would be much the same as AA. Its not really an issue for me. I find pushing the button to buy or sell is about as emotional as doing the dishes. But Im still fairly new at this and neither my gains or my losses are life changing .

[Phaedrus]

You're watching the results rolling in and in comes one you're not too happy about. What do you do?
Theoretically, you back your own judgement and sell. Immediately. Why wait for the other shoe to fall? I can see you have 2 problems here, though.

Firstly, your selling appears to be indecisive. You "waste hours placing offers which don't get hit." If you want out, you want OUT. Sell the lot at market or place offers that will get hit. You make a logical decision to sell, then "nickel and dime" it to death.

Your second problem is caused by buying illiquid stocks. If they are illiquid enough, selling is not even an option - you are essentially stuck with them, locked in to a stock that no longer meets your investment criteria. I know that good profits can be made with lightly traded stocks, but there are times when their downside is painfully obvious.

So, either accept that this sort of thing will happen if you invest in illiquid stocks - or stop buying them!

PS: You could, of course, compound your original error by buying more, on the basis that the the market has over-reacted to news that wasn't really that bad. Call it "topping up" - this sounds so much better than averaging down don't you think?

[drillfix]

The next best thing to do in this situation is improve your sense of humour and then remember this:

October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February.


Sorry, :D:rolleyes::eek::rolleyes::p

[AMR]

Liz, take a look at Thomas bulkowski's research on "dead cat bounce". He has outlined some strategies to deal with a sudden plunge.

[Lizard]

Thanks AMR! Have found this link for starters:
Bulkowski's Event Pattern Resource (http://thepatternsite.com/eventpatterns.html)

And thanks to Phaedrus for the "hard words". :)

[Hoop]

At the desk where I make most of my investment decisions...I have in full view in front of me a 2 x A4 pages pinned to the wall showing all 12 Zurich Axioms...this is my investment bible. Before I buy or sell I look to see if the Zurich Axioms agree...These two bits of A4 paper has saved me (and earn't me) thousands of $$$. Obtaining the Zurich Axioms is the best investment I have done.

In relation to this ST thread... 3 of the 12 Axioms are relevant

Axiom Number 3
" On Hope"
When the ship starts sinking, don't pray, Jump.
**Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.

Axiom number 6
" On Mobility"
Avoid putting down roots. They impede motion.
** Do not become trapped in a souring venture because of sentiments like loyalty or Nostalgia.
** Never hesitate to abandon a venture if something more attractive comes into view.

Axiom number 11
" On Stubbornness"
If it doesn't pay off the first time, forget it.
**Never try to save a bad investment by "averaging down".

Click on The Zurich Axioms
by Max Gunther
1985 (http://neif.org/Zurich_axioms.pdf)

Its a PDF file of 131 pages. It may take you a hour to read and digest it but it will be the most valuable hour you have spent for a long while. A must read for all investors

A couple of pages of condensed notes from Deeshaa an Indian website (http://www.deeshaa.org/2003/11/24/the-zurich-axioms/) for those who can not afford the time to read 131 pages( they would afford the time in the future, if they did read those 131 pages:)).

An expanse on the 3 Axioms I mentioned above (from Deeshaa)

Major Axiom #3: ON HOPE When the ship starts to sink, don’t pray. Jump.
About half your speculations will turn sour. Half your guesses will be wrong.
It is one of the most difficult things, knowing how to get out of a bad situation. It takes courage, and a kind of honesty with a cutting edge like a razor.
The first obstacle is the fear of regret (see also #2), where you fear that a loser will win again if you cut loose.
If you wait for the investment to go up again, you could wait years, and your capital will be stuck, languishing in the slough of despond.
The second obstacle is the need to abandon part of an investment. Cutting loose hurts.
Never speculate on margin - ie. borrowing money to invest.
The third obstacle is the difficulty of admitting you were wrong. Refusing to admit you were wrong is the wrongest response of them all.
Minor Axiom #3.4 Accept small losses cheerfully. Expect to experience several whilst awaiting a large gain.
Take a small loss. If the ship continues to sink, get out.
Don’t use ‘Stop-loss’ orders (ie. standing order to sell if stock falls below a preset figure). It robs you of flexibility.
Don’t wait around for trouble.

Major Axiom #6: ON MOBILITY Avoid putting down roots. They impede motion
The more you seek being surrounded by the old and familiar, the worse a speculator you will become.
Minor Axiom #6.9 Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia.
There may be times when you will have to choose between roots and money.
Get attached to people, not to things (eg. houses, places, companies).
Minor Axiom #6.10 Never hesitate to abandon a venture if something more attractive comes into view.
Beware of speculations which turn into hobbies (eg. when speculating in art!).
Don’t get trapped waiting for a payoff. Don’t get to feel the investment ‘owes’ you (or, worse, you ‘owe’ it).
Make the ’switch’ decision solely on the speed of payoff.

Major Axiom #11: ON STUBBORNNESS If is doesn’t pay off first time, forget it.
Perseverance falls into the same camp as optimism: it can often just dig a deeper hole.
It is an emotional response, feeling that the investment ‘owes’ you something.
Minor Axiom #11.15 Never try to save a bad investment by “averaging down”.
ie. if the price halves, double your investment (thus reducing the break-even price by 25%).
This is throwing good money after bad. See Axiom #3.
Only buy at new price if you’d do it anyway.

[winner69]

Good stuff Hoop

Should also be on the thread about fiascos that Phaerus started .... reinforces what has been said on there, esp about averaging doen a la PEM

[Phaedrus]

There will be cases when each of the 4 actions listed will turn out to be the best option, but only the passage of time will reveal which one proved to be best in any given instance. So, what we are trying to do here is go for the one that is most likely to be the best. The one that has the most favourable odds.
Generally, a bad earnings surprise will bring a drop in the shareprice and since most everyone else finds out about the same time as you do, you can't really hope to get out much ahead of the mob, but I guess it is worth trying. At a practical level, then, options 1 and 2 are pretty much the same and are the way to go, in my opinion. Bulkowski tells us that "A bad earnings surprise follows a bad earnings surprise 74% of the time". This means that we have 3:1 odds that more bad news and further shareprice deterioration will follow. That's why getting out is the logical decision.

Bulkowski also tells us that "almost half (47%) bottom in one week" so to go for option 3 and sell in a week is probably a bad move.

The largish percentage of voters going for option 4 (the bottom drawer - otherwise known as the "kennel") is a worry! The odds are 3:1 that they will be hit again when the second shoe drops. Now here's a scary thought - If this poll had a fifth option "Buy more - take advantage of the temporary weakness" I reckon that some people would have voted for it. Unable to accept that their initial investment was a "mistake" they would be seeking to average down, lowering their average entry price and breaking 3 of Hoop's Zurich Axioms. I put "mistake" in inverted commas, because these people made their initial Buy decision on all the information available to them at that time. They can hardly be blamed for the fact that some negative news came to light later, making their initial buy decision "wrong". When they should be acting on "Minor Axiom #3.4 Accept small losses cheerfully" they are doing......nothing.