You are hearing some positive news about a company from everywhere, the products look good, the marketing looks good, the management guidance looks good, the analyst review looks good and as a result you conclude that the company will post good financial results and hence it makes sense to buy truckloads before the results are declared. Then comes the result day when your prediction will come true and your investment will give you great gains. The news is out and the company has indeed declared great results, you are the new oracle of stock markets after all you predicted the future that this company is going to post good results this time. Time to look at the stock price and book hefty profits on your trade. And just as you open the quote page the first three words that come out can only be expressed in abbreviation here, WTF?
What went wrong?
You forgot that the product, marketing, management guidance, analyst review was available to everyone in the stock market and everyone had concluded just like you that the results are going to be good. The smart one's just went a step ahead and concluded that lot of investors will buy into the stock at premium valuations in anticipation of good results and they prepared themselves in advance to profit from your readiness to pay a premium that is greater than fair value even after taking into account the expected great results. So what really went wrong are quiet a few things. You didn't do your math, you got the news right but not the numbers, you got carried away by the market frenzy. You committed the cardinal crime of thinking that you are the only smart person in stock market.
Every stock no matter how good becomes expensive beyond a certain value. Although let me warn you that the reverse is not true, some stocks no matter how cheap may not be a good investment because they are simply bad stocks and their value is zero which cannot be traded.
The method of discounting
Well the official term in the stock market for such an incident is called "discounting" The result was expected to be good and it was already discounted in the stock price so when the results were declared as expected, the market was not impressed and hence the sell off. If the results were better than expected, it could have run up more. If it was as expected it might fall a bit due to profit booking and if it was below expectations it could have taken a severe hit.
Moral of the story
In stock markets don't expect the expected but expect the unexpected .. always !
What went wrong?
You forgot that the product, marketing, management guidance, analyst review was available to everyone in the stock market and everyone had concluded just like you that the results are going to be good. The smart one's just went a step ahead and concluded that lot of investors will buy into the stock at premium valuations in anticipation of good results and they prepared themselves in advance to profit from your readiness to pay a premium that is greater than fair value even after taking into account the expected great results. So what really went wrong are quiet a few things. You didn't do your math, you got the news right but not the numbers, you got carried away by the market frenzy. You committed the cardinal crime of thinking that you are the only smart person in stock market.
Every stock no matter how good becomes expensive beyond a certain value. Although let me warn you that the reverse is not true, some stocks no matter how cheap may not be a good investment because they are simply bad stocks and their value is zero which cannot be traded.
The method of discounting
Well the official term in the stock market for such an incident is called "discounting" The result was expected to be good and it was already discounted in the stock price so when the results were declared as expected, the market was not impressed and hence the sell off. If the results were better than expected, it could have run up more. If it was as expected it might fall a bit due to profit booking and if it was below expectations it could have taken a severe hit.
Moral of the story
In stock markets don't expect the expected but expect the unexpected .. always !
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