I get pinged by people every now and then about what should the stock market be doing. Several of these requests have even been from co-workers with whom we share stock options. Of course we want to figure out the best time to exercise options!
- the stock rallies then slumps by the end of the day due to day traders cashing in on the rally
- company beats an earnings estimate and rallies over several days, even a few months
- company misses an earnings estimate by a penny, and drops thirty points
- news about an acquisition causes stock to rally five points
- news about a new court case causes stock to drop fifteen points
The company that holds my stock option beat it’s quarterly earnings estimate three months ago and recovered from the mid 60s up into the mid 90s. Then it beat its latest quarter earning estimate by a penny. What happened? It dropped five points in after hours trading. The next couple of days didn’t improve much. What’s with that?
I recently formed a plan that I would wait until I got my final BIG chunk of stock, which is coming in the next week or so, and THEN make a real decision on whether to cash out. I have a certain price in mind at which I would sell immediately. My hope is that by beating the latest estimates, it will make it there. But who knows?!?
When I get the money, I hope to buy a big chunk of stock from my short list that I haven’t mentioned yet. I also hope to reload the cash reserves backing my real estate investments. I can then open a custodial account for the latest addition to our family. And after that, there should be enough cash left to buy a new CUV with no auto loans. Maybe just maybe the price will rally enough that I can actually buy two positions.
Metrics of a company
I have observed stocks miss an earnings estimate, tumble 30%, then make the next quarterly estimate and recovery most of what was lost. The thing is, we are talking a time frame of six months. Businesses don’t make huge, fundamental, life altering changes in such a short time frame. But their stock price can rise and fall by huge swaths.
This means that situations where you expect the price to rise, others may decide to dump their positions, and it can push the price down. Like I said before: you CAN’T predict the movements of the market. Countless studies have been made that demonstrate day trading based on these factors tends to cause people to lose money.
Let’s study those that HAVE beaten the market consistently
We just discussed how you can’t predict movements of the market. Yet people like Warren Buffett HAVE beaten the market by wide margins 40+ years. How??? It seems sensible to investigate what he does compared to the entire investment industry, right?
He either buys businesses themselves, or large chunks of stocks. That is why Berkshire Hathaway owns companies like Geico, Dairy Queen, and Acme Brick Company. But they also own millions of shares of Coca-Cola, Wells Fargo, and IBM. These businesses all built solid sources of revenue and many generated powerful cash flows that Berkshire Hathaway has managed to use to accrue yet more investments.
So in the end, I can’t help you predict the movements of stocks. I can’t suggest when the best time is to exercise your stock option. You have to choose for yourself and be happy with your deal. In my experience, it seems often that as soon as you exercise some options, the price suddenly jumps. Never look back. Instead, take the equity you just collected and put it into better performing places like blue chip, dividend kings or leveraged rental property. Or recharge your cash reserves.