Reverting to the Average

The wheel of fortune is always spinning on Wall Street and some days it is in your favor and others it is not. With good research and strong companies hopefully you come out ahead and the wheel is in your favor more times than against it. I don't think you should be constantly trading stocks based on news and sentiment on the street. Many times it is based off fear and causes money in the hands of brokers and you losing money. However a way to play with stocks is the idea that all stocks will revert to the average gain at some point. In this case it would be the S&P 500. 

A stock that has shot up recently will probably come down some in the next few months off it lows. Not always the case and this is why it is a bad idea to gamble here. But it probably will go down, once it misses its earnings or just because people have moved on to the next hottest stock.

The beaten up stocks unless they are truly fundamentally flawed (where good research will help you out) will probably go up in the next couple of months and maybe even outperform the market. This is the same theory as the Dogs of the DOW but slightly updated and now can be used al the time. 

Those that are depressed will go up quickly and make a quick buck for the investor and others will quickly fall which if shorted would make money. Again though it does not always work and every investment is a risk because of uncertainty. Anything can happen but probably in the end everything will revert to the mean. 

I Love Earnings Season

It happens four times a year and it is the most exciting for us normal investors. Investors get to see the performance of the companies they picked and might find some deals after an earnings miss. Hopefully each stock you invest in beat or at least met the guidance and expectations. It solidifies the choices and justifies the risks taken, hopefully with profits in the portfolio.

Sometimes though it can create massive losses as it did this earnings season with those invested in Coke, McDonald's, and IBM. This is why due diligence must be performed for every stock and even then sometimes you can loss big. Warren Buffett is the king of researching a company and normally does not loss money on investments but he lost supposedly at least two billion in a matter of days. Unless he sells though he could recover his losses and even make more money. Still very bad though to have stocks you own go down. It will happen but do not be too hasty and sell from one days down movement. It can always go back up and if the company is strong and solid it might not matter.

Use these few weeks in earnings season to learn about the companies you are invested in and pay close attention. Read the entire report they give to investors. This is the time to make decisions for next year and maybe drop a few underperformers or those that lowered guidance. Enjoy this choppy time in the market and happy investing.