NEW YORK (
) -- Traders and investors love short-term pops in stocks. Even if you're looking to get short, there's nothing like strength, particularly if you know how to fade the move.
Sometimes catalysts -- legitimate or otherwise -- fuel sudden strength. Often, upside sustains and a company's stock shows life for a longer period. Typically, this occurs when a firm reports solid financial metrics consistently. There's nothing wrong with riding these trends. In fact, that rather straightforward method defines, from one major perspective, what trading and investing is all about:
Follow the trend and buy shares of companies that put up solid numbers, as per your MBA textbook, quarter in and quarter out.
Like most things in life, this plan works until it doesn't.
By not looking beyond the quantitative and digging into the qualitative, you can fall into a trap. It's one of the pitfalls of an ardent (dare I say, stubborn and brainwashed) MBA mindset.
When the financial metrics of a business begin to go awry, many great business minds sit in a room and crunch the numbers until they think they figured out what went wrong. They move a number here, make a projection there and give it a couple of quarters to do its magic. Investors, who have full confidence in a management team that has always delivered the quantitative goods hang on, maybe even buy more and wait for the obligatory recovery of "the business."
Generally, investors have no choice but to let management continue along on its preferred track. Very few of us hold enough sway to qualify as "activist" investors. And unless we can create an unprecedented groundswell of opposition it's next to impossible to shake the status quo at most companies.
This does not mean you have to sit idle.
If you haven't already, consider putting greater focus on the qualitative side of the story, even when the quantitative side appears to be rolling on all cylinders. By doing this, you can often tell the difference between an ultimately meaningless rough patch, an errant quarter or endemic problems that spell prolonged weakness, pending doom or both.