When I first started investing in stocks, the idea of playing earnings reports seemed like a no-brainer. Companies release their quarterly numbers, and if those numbers beat expectations, the stock price goes up—simple, right? At least, that’s what I thought. After a few experiences (and some painful losses), I’ve learned that earnings plays are far more unpredictable than they seem.
Here’s what I’ve discovered about earnings plays, why I no longer use them as a strategy, and what I’ve learned along the way.
1. Is the Price Already “Baked In”?
One of the hardest things about betting on earnings is figuring out if the current stock price already reflects expectations. I’ll never forget my experience with Tesla after they launched the Model Y.
Tesla was on a roll, and anticipation was high leading up to the quarterly earnings report. I thought, “This is it—there’s no way the stock doesn’t pop after such a strong product launch!” I bought in heavily the day before the report, fully expecting the stock to skyrocket the next morning.
And then… the earnings came in, and they were great. Tesla beat market expectations across the board. But when the market opened the next day, the stock price tanked.
It turns out, I wasn’t the only one who thought Tesla was going to crush earnings. Everyone else had already priced in those expectations, so when the results were merely “great” instead of “outstanding,” investors started selling to lock in profits.
I’ve also seen the opposite happen. During another earnings season, I watched a stock slide in the days leading up to its report. Investors were nervous about poor results, so the stock was oversold. But when the earnings came out—and weren’t as bad as everyone feared—the stock soared.
These experiences taught me that earnings aren’t just about whether a company beats expectations. There are so many variables: market sentiment, pre-report price action, and even the broader economic environment. Predicting these moves felt less like investing and more like gambling.
2. The Problem with After-Hours Trading
Another issue I’ve had with earnings plays is the timing. Most companies release their earnings either before the market opens or after it closes. This means that the biggest moves happen outside of regular trading hours.
I remember one time I was holding a tech stock ahead of its earnings, and the numbers were disappointing. The stock dropped like a rock in after-hours trading. By the time the market opened the next morning, it had already fallen 20%. I had no chance to exit before taking the full hit.
You can try to manage risk with stop-loss orders or other tools, but they often don’t help much when earnings are announced outside of trading hours. The gap between the closing price and the post-earnings price can be massive, and there’s little you can do to protect yourself.
This lack of control made me realise that earnings plays are inherently risky. As an individual investor, I felt like I was at a disadvantage compared to institutional traders who have access to better tools and can execute trades in after-hours markets more efficiently.
3. Earnings Plays Can Feel Like Gambling
Warren Buffett famously said, “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.” That quote stuck with me after I lost a significant chunk of money on earnings plays.
Stock investing is about managing risk, not taking unnecessary gambles. Earnings plays, however, often feel like a roll of the dice. No matter how much research you do, there’s always a chance the market will react in ways you didn’t anticipate.
For example, I once took a position in a consumer goods stock ahead of its earnings. The company had just launched a popular new product line, and I was confident they’d report strong sales. They did—but the CEO mentioned in the earnings call that inflationary pressures were squeezing margins. That one comment sent the stock tumbling, wiping out weeks of gains in a single day.
After a few more surprises like this, I realised that earnings plays were too stressful and unpredictable for me. It felt like I was gambling more than investing.
A Better Way to Approach Earnings
These days, I don’t use earnings as a trading strategy. Instead, I view them as an opportunity to measure a company’s progress. Here’s what I focus on now:
1. Long-Term Trends: Earnings reports help me see if a company is on the right path. Are revenues growing? Are margins improving? Is the company maintaining or improving its market position?
2. Management’s Vision: Earnings calls often reveal insights about the company’s future plans and potential challenges. I pay attention to what management says about upcoming products, market conditions, and growth strategies.
3. Valuation Opportunities: If a stock drops sharply after earnings but the long-term outlook remains strong, I might view that as a buying opportunity.
For example, when Apple announced lower-than-expected iPhone sales one quarter, the stock dipped. But after listening to the earnings call and understanding their strategy for services and wearables, I decided to buy more. That decision paid off as the stock rebounded in the following months.
Conclusion
Earnings plays can seem like an exciting way to make quick gains, but they come with significant risks. The unpredictability of market reactions, the challenges of after-hours trading, and the difficulty of knowing what’s already priced in make it a tough strategy for most individual investors.
Instead of trying to guess how the market will react to a single earnings report, I now focus on the bigger picture. I use earnings to evaluate a company’s long-term potential and make decisions based on fundamentals, not short-term noise.
If you’re thinking about playing earnings, I’d encourage you to reconsider. Use those reports as tools for research, not gambling chips. As Buffett says, the most important thing in investing is not losing money—and that’s a lesson I’ve learned the hard way.
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