There is a fact that many retail investors ignore about their ASX shares.
It is that the biggest shocks to the portfolio don't usually come from external forces like inflation, interest rates, or wars in Europe.
It's most likely to come during reporting season.
"Results present a bi-annual moment of heightened risk for all stocks that report," stated the analysts at Marcus Today in a blog post.
"Thanks to continuous disclosure requirements — meaning companies' dump' information at results — and high-frequency trading, the results reactions can be surprising and savage."
These conditions can mean even multibillion-dollar S&P/ASX 200 Index (ASX: XJO) companies can see their share price shift 20% on results day, sometimes within minutes.
"Thanks to the herd that now thunders around the market in the short term, and the computers that react to a whiff, rather than a sniff, or even a taste, the results season has become a dangerous time," read the memo.
"Holding stocks in August and February (the two results seasons) is like running around in an orange vest on a battlefield during an artillery barrage — you're never quite sure whether you're going to get blown up."
So to assist investors, the blog post set out some rules to successfully navigate the August reporting season.
Image source: Getty Images
Know your reporting schedule
This one's pretty basic. It's to simply know which dates companies in your portfolio will announce their results.
"If you find a stock you hold is down 10% one morning after announcing results you didn't know were due, it is a bit negligent," read the memo.
"Don't be surprised by announcements — there's no excuse."
History of surprising
Although past performance is no indicator of the future, certain companies have a track record of under-promising then over-delivering.
The Sydney Morning Herald's Elizabeth Knight has written about how Macquarie Group Ltd (ASX: MQG) has such a habit, which is reportedly dubbed "Macquarie speak".
Switzer Group's Paul Rickard has mentioned multiple times how CSL Limited (ASX: CSL) has a record of surprising on the upside during reporting season.
Identifying such companies before they report can be fruitful, according to the Marcus Today team.
"Go back and look at the last earnings announcement — the AGM maybe, a trading statement, a presentation — and see if the share price went up or down, whether it was positive or not, and whether brokers upgraded the next day or not," read the memo.
"It is unlikely a company that has seen earnings upgrades running into results is going to disappoint, and there is an even better chance they will not disappoint."
Don't catch the falling knife
The other side of the coin is to not buy into down-in-the-dumps ASX shares, expecting a miracle turnaround in its results.
This is especially prudent in a turbulent year like 2022.
"Don't catch the knife. Don't swim against the tide. It's not clever — it's dumb," read the blog post.
"It's a game of odds, not heroics… Don't bet on results being surprisingly good when the history is bad. For most of us, results are about risk minimisation, not risk-taking."
Safer way to harvest a dividend
Rather than gambling on a dividend-paying stock before the results, just wait to see how their numbers look.
"If they are okay or good, buy the stock after the results and still collect the dividend that's coming up. It's dividend-stripping in full possession of the facts and avoids the gamble on the results."
"If the results are good quite often, the stock will trend up after the announcement as well."
Don't think you missed the boat
If a company reveals excellent results and the share price rockets up, don't give up on buying, thinking you've missed the boat.
"There is an academic study about shock drops and shock rises in share prices. The conclusion was that when it comes to shares, a stock that has a shock move up or down continues to move in that same direction for the next nine days," read the blog post.
"It's the nine-day rule. In other words, if a stock has a good set of results and pops up 5%, don't say 'I've missed it' — just buy it, because it is likely to keep going in that direction for a while."
The theory is that the initial boost is just the start of a longer-term rise for the stock.
"The research the next day will be upbeat. Brokers will raise target prices and recommendations over the next week — fund managers make decisions slowly, it takes a while for the news to be discounted," the memo read.
"You may miss the first day and the best day, but you'll catch the next few days of trend, and your risk is much lower than punting ahead of the results."
