Bad News Bears: Reacting to Bad News

  by Tyler Curtis

by Tom Doan

In the Information Age, nearly everyone has access to boundless amounts of information at their fingertips thanks to the Internet. When researching stocks, investors can access statements and news within seconds of opening a web browser. This allows information to reach your hands much quicker than receiving financial statements in the mail or waiting for the newspaper or televised news program in the evening. Since news travels faster, this also allows investors to rapidly react the moment they read good or bad news about a company. If an investor reads news about one of their stocks underperforming earnings, they may want to sell their stock, thinking this news will cause their stock to decrease in price. However, this course of action may not accomplish what the investor is looking to do.

Today news may travel fast, but there’s always a source from which it spreads. No matter how fast the news travels, there will always be people ahead of you that hear the news and react accordingly before you have a chance to. For example, company XYZ is releasing an earnings report that exceeded expectations. This would theoretically increase the stock price so investors would want to buy shares in expectation of an increase in value. The first people to know about the report would most likely be the insiders of the company and/or accounting firm that audited their statements.

Most news that will have a significant impact on a stock’s price will be announced when trading is closed.  Stocks may be halted during trading for any major announcements.  By the time an article is drafted, edited, and posted on a website for you to read, the stock market has already reacted to the earnings report. As a result, purchasing shares because you think the stock price will go up due to the news will not achieve your goal since the stock price has already reacted accordingly.

I receive many phone calls from clients worrying that their position will decline due to an article that they read on the Internet. Their intention is to sell the stock before investors react and jump ship before it sinks. However, what they do not realize is the current stock price already reflects the news and their desire to make a pre-emptive move is actually post-emptive. It never hurts to be informed, but unless you’re an insider or one of the very first people to have access to certain information, the stock market would have already reacted to it by the time you get a chance to.

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