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Wait 30 Days After Warnings

 

 

Rule 22

Few rules have saved me more than the 30-day preannouncement rule.

When Tibco Software (TIBX - news) preannounces a bad quarter, do you rush to buy it? Are you someone who put money to work in Waters (WAT - news) right after its vicious preannouncement in spring 2005?

If you are, this rule is for you:

Always wait 30 days after an earnings preannouncement before you buy.

I designed it because I recognize how compelling some of these price adjustments are, but they often are not deep enough to make the stocks ultimately attractive.

Here's why. When a company preannounces a bad quarter, it isn't just looking at the past. It is looking at its order book, its future. Believe me, if there were any hope that the company wouldn't have to preannounce — hope in the form that maybe something could get better, not worse in the next 30 days — the company would wait.

Preannouncements signal ongoing weakness. That's why I like to wait 30 days to see if anything has gotten better before I pull the trigger to buy.

Sure, I will miss some great opportunities. Most of the time, though, after 30 days, I find that there is more woe and another leg down! If there isn't, then I might miss a point or even 2, but I will be on terra firma. That's the only thing you want to be stepping on in any market, including this one.