“I don’t know if you follow Compaq but it seems the little guys again were in the dark over the recent ‘shocking’ quarterly earnings report. Seems only reporters and analysts are unaware of the real behind the scenes news. As usual, Compaq (insert any stock here), seemingly knocking the cover off the ball, started to bleed about a week before earnings were to be reported. The stock fell from a recent high of 35 to around 27 the day before earnings were to be reported (first thought was that people were not sure about the Digital Equipment deal). And surprise, surprise, Compaq reported flat earnings. Must be a lot of good information floating around out there that never makes it into an analysts report. On top of that, isn’t it convenient that only market makers and institutions get to trade this information after the ‘oh so grateful to their shareholders’ companies (again, insert any stock here) make these reports after the markets close (read that to mean only the day market available to little people, not Instinet). These after-hour announcements eliminate any chance of a small investor making a buy/sell decision based on the latest information. The poor little investor can only sit and watch as the market makers hammer his stock before it even trades the next business day. I guess this ranting leads to my question: Why do companies now report their earnings after the markets close?” -C.R. Hancock

Well ranted, C.R. You make good points. But here are a couple of other thoughts to consider:

  • First, as hard as the SEC tries to discourage it, the little guy should be aware that he will always be the little guy – that neither Merrill Lynch nor his deep discount broker is going to call him first when there’s a whisper of good or bad news out there. He’s also unlikely to spot the CEO looking depressed or snappish out on the golf course (reason enough to sell, no?).
  • So while there may be reasons to pay for Merrill Lynch’s personal touch, the value of its research is probably not one of them. Like anyone trying to predict the future, Merrill is often right, often wrong, and more likely to stress the former than the latter. Its analyst is certainly not going to call you before she calls the firm’s biggest clients.
  • This is a reason to buy and hold for the long run, rather than try to catch short-term swings. Not only do you save on taxes (and commissions and spreads), you largely eliminate this little-guy disadvantage. Someone may know something you don’t about Compaq’s upcoming news release, but its next 10 years will be based on bigger trends.
  • It’s also a reason to think twice about high-multiple stocks, or at least to be prepared for downside shocks.
  • Second, no company, Compaq or otherwise, can provide a completely smooth information flow, free of surprises. Sometimes the surprises are good, sometimes bad. When they’re good and the stock jumps (and even if it creeps up before it jumps), they tend not to annoy us or raise red flags.
  • Releasing information after the close of the market is intended to give everyone a fair shot at it, not just the pros who get the news instantly on their screens at work. This is done mainly for the protection of dental patients. The hope, as the drill nears their nerve, is that Dr. Payne will be concentrating on your molar, not the CNBC ticker. Later, as the Novocain is wearing off, he can leisurely review his portfolio and catch the news about Compaq along with everybody else.
  • What happens in the after-hours market is probably not as unfair as you think. That’s because typically, if there’s been bad news when the stock closed at 35, the next trade will not be at 34¾, say, or even 34, but perhaps 32 or 29. Sometimes, because of overreaction, the first after-hours price will actually be lower than the price at which the stock opens the next morning — the price you’d get. So I’d say the part to be angry about is the pre-news creep (people trading on inside information, whether clear-cut or gray) but not particularly the after-hours trading.
  • Releasing the news after the market gives you a chance to do things like cancel your good-til-canceled orders and reset your stop-loss limits. (Say you’d had an order in to buy at 34¾ — without this breather, that’s where you would have bought the stock; now, you have a chance to lower your bid or remove it altogether.)
  • This is a good thing, not a bad thing.

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