Crowdstrike was down over 4% last night even after amazing results, and when was rest of the market was largely green. How is this possible?
It’s always disheartening when a company you’re invested has given objectively good news and even beats consensus, but the market has punished them for illogical or frivolous reasons.
This has happened to me countless times. I would stay up and read earnings previews, and overthink whether I should buy or sell. I would want to buy if I thought the news was good, and sell if I thought the news would go badly.
But I have learnt that good news can be bad for the share price and vice versa. It didn’t make sense and I used be very frustrated and perplexed.
With experience, I can say that drops after good earnings don’t really bother me anymore. I can read and interpret the news myself, and I know whether staying invested makes sense. I’ve also stopped expecting the market to agree with me, and that it misprices assets all the time. We can only make money when the market is mispricing anyway. The market and I can disagree, but sooner or later, others will realise the company’s worth. It may take a while, but the time it starts to rise is often when you and I have already thrown in the towel.
When deciding if a stock is worth keeping, here’s what I consider:
- Is the business healthy and growing? Are trends still in its favor?
- Are there new and better competitors? Is my company still a market leader?
- Is any bad news temporary or will affect the business permanently?
As long as all the answers are yes and problems are temporary, I stay invested. I sell when I feel the business has fundamentally changed (e.g. Alibaba with Chinese government), they lose their competitiveness (e.g. Netflix), or go into a business I find risky (e.g. Paypal and Square). I also sell when there are better risk-reward deals out there.
This strategy has worked for me and suits my style as a buy-and-hold investor aiming for multi-baggers. If I had sold after every bad reaction, I would never have returns in the double-digits. A drop in price after good news usually serves as another opportunity to buy more. And frankly, my experience is that the fall doesn’t last long, and it’s shaking out the weak hands.
As I don’t have a large number of counters, I know my companies pretty well. FUD (fear, uncertainty, and doubt) doesn’t faze me when I have read so much and have built conviction in the company.
So stay cool and know your investment.
Have a good weekend!