The greater the degree of uncertainty, the greater your risk in holding a position in a stock. All stocks are uncertainties, but there is no moment of greater uncertainty than that of an earnings report. It’s the time when the company reports on how well it is doing now and how well it expects to do in the future. Often times, other major announcements are made as well. It can be a time of extreme volatility, especially with small cap, high growth, CANSLIM style stocks. Sure, the upside potential can be great, but there are too many things that can go wrong, which could cause the stock to plummet. Remember, the name of the game is preservation of capital. You can always repurchase the stock once the coast is clear.

A company may report below analyst estimates, or the whisper number (earnings that the company is rumored to report, often leaked by an insider). There are times when a company will beat the analyst estimate, but not the whisper number and sell off.

They may release negative news about the company, the industry, or reveal a less than optimistic outlook for the future.

“Buy the rumor, sell the news”. Often times a stock will rise ahead of expected good earnings, only to sell off once the great earnings are released.

Here are a few recent examples:
AU Optronics (AUO) recently reported blowout earnings on April 27 and has been plummeting ever since. While the weakness in the market is to blame for some of the selling, it’s a classic case of buy on the rumor and sell on the news. Investors sent the stock soaring nearly 100% since the last earnings report, expecting the company to continue to report great earnings.

Tumbleweed Communications (TMWD) is a fast growing provider of spam, virus and fraud protection software that reported less than stellar results on April 27th and promptly sold off. It’s down more than 60%.

The #1 rule of investment success? Keeping losses small (8-10%). When you are wrong about a trade, admit you are wrong and move on. It’s as simple as that. Get over your need to be right, or it will devastate your portfolio. In fact, by keeping losses small, you only need to be right about half of the time to be considered a successful investor. Remember this fact because it’s important.

Think about it.. three consecutive 8% losses can be overcome by one 30% move in a stock. Believe me when I say that buying a successful breakout of a leading stock can yield you a 30% gain in just a couple of weeks if not less. However, hold onto a loser for a 50% loss and the stock would have to bounce back 100% for you to recoup your losses. Many who held onto their losses throughout the bear market of 2000 may never recoup their losses.

In a recent recommendation to my members at SelfInvestors.com, I highlighted a breakout of Aluminum Corp. of China, which had just surged to new highs on heavy volume. Within days, the stock reversed, fell back into its base and ultimately plunged below major support. A sell decision was recommended just as the stock fell below major support of the upper trend in green and the 50 day moving average in red (see the chart below). As you can see, by holding onto the stock you would have suffered a crushing loss as the stock plunged another 25% over the next couple of weeks.

Before getting into my first post, I’d like to say I’m looking forward to what I hope will be an informative and educational running dialogue for investors interested in the CANSLIM (CANSLIM is an acronym describing elements of the investing strategy)approach to investing. While I do run a website for CANSLIM investors, I like the idea of an informal arena for exchanging thoughts with other investors. For more information on this style of investing you can check out the tutorial I have set up on my web site.

When making a decision to buy or sell anything with a high cost what do you do? Well, if you’re a smart shopper, you check out that item thoroughly. For example, buying a house is the largest purchase most people will make. It pays to spend considerable time checking out the merchandise. You’ll probably look at the price of other homes in the area, the quality of schools, location of shopping and recreation, future growth, the quality of the home itself, etc. Making the decision to purchase a stock is no different, however few people take the time necessary to adequately research a stock before spending their hard earned money.

Of course there are many approaches to researching a stock, however an approach that looks at every angle is the most desirable and the CANSLIM method of investing developed by William O’neil does this very well. It’s the reason why it is one of the top investing strategies around. The key to its success is that it uses what I like to call a top – down approach. Looking at the big picture (the economy, interest rates), then the market itself (using volume and price analysis), the industry groups (where in the market the strength lies – there are always pockets of strength) and finally the stock itself (using fundamental and technical analysis). Yes, it can be a labor intensive stock picking strategy, but their are services available (including my own site), that help you invest in the highest quality stocks when the market is strong.