and will discuss how they actually did, not how they did compared to some analyst’s expectation.
Saul, what a great lesson in that how a stock price reacts is never solely a function of well how the company did or didn’t do the previous quarter. A stock’s price changes based on how well the market believes the stock will do in the upcoming quarters.
Horse race betting is probably a pretty good analogy. One of the greatest horses of all time, Secretariat, won the Belmost Stakes in 1971. No horse has ever been faster on dirt - he set the World Record there, beating the second place horse by 31 lengths (a track record as well).
And what did betting on this horse pay out? Ten cents on the dollar - such a puny payout that over 5,000 winning tickets were never cashed, presumably to be kept as souvenirs. We’re talking arguably the best thoroughbred EVER and it had the puniest payout. Crazy, right?
Stocks are the same way. As Saul rightly points out, Amazon revenue was up 29% and earnings tripled and yet the stock price declined. Why? Because everyone knows Amazon is a great company and is going to do well. So, like bettors piling on Secretariat, investors have piled on Amazon with the same net effect.
Let’s look at another popular company, although not a “Saul Stock” - FB. Facebook had a great quarter with revenues up 56% and EPS up 161%. But the price fell because management said that growth will slow in the future and that costs will rise as they need to invest in attracting and keeping top software development talent in the expensive Bay Area market. Mr. Market may not believe management when they’re optimistic about the future, but they always believe them when they’re pessimistic.
Look, finding great companies that will do well in the future is actually pretty easy (look at Amazon). But, that’s not good enough in terms of making money buying and selling stock and options. The real trick is picking companies that are going to do better than the market believes they will. You have to be better as an individual than everyone else is in aggregate. And so for me every stock and option trade is based on whether I think the market has it wrong enough that I’ll make money as what I think proves out in the long run.
It’s a scary game. There are a lot of smart people with decades of experience, direct contact with company and competitor’s management, deep market understand, and access to sophisticated computer models. So as an amateur, beating them isn’t easy. The experts aren’t always right, but everytime I trade I ask myself why I believe I know better than them. It’s humbling.