Sequential Earnings Trades Versus Diversifying Across Stocks
Summary
The question asks whether limited capital can produce a larger payoff by requiring several stocks to meet a return threshold, rather than holding equal investments in each. The response proposes a different approach: if expected price moves occur at different times, capital could be rotated sequentially among stocks, entering before each anticipated event and moving on after the price reaction slows. If events happen together, it suggests prioritizing the stock expected to react fastest, then reallocating as that move fades.
The answer gives a hypothetical compounded return range under assumptions of perfectly accurate forecasts and favorable timing. It explicitly cautions that such forecasting accuracy is very difficult in reality. The strategy depends on event schedules, the timing and speed of price adjustment, and the ability to execute trades as intended. It is not a guaranteed way to increase returns, and the discussion does not quantify transaction costs, slippage, taxes, or the risk of losses when earnings reactions differ from expectations.
Key ideas
- Sequentially reallocating capital may compound returns when anticipated stock moves occur at different times.
- When events coincide, the response suggests rotating among stocks according to the expected speed of their price reactions.
- The hypothetical return estimate assumes perfectly accurate forecasts and favorable timing.
- Forecast errors and trading frictions can undermine the proposed approach.
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# Getting a better return on multiple combined stocks than individual stock gains (like a sports accumulator) # Getting a better return on multiple combined stocks than individual stock gains (like a sports accumulator) I've identified 4 stocks that I think will gain 10 - 20 % when their next quarterly report is released. If you've only got access to a small amount of capital say USD10,000 then by buying USD2,500 worth of each stock and then each gaining 15% you'd only gain around USD1,500 which by itself isn't inconsequential, and if you had a large amount of capital employed 15% would be very welcome, but with a limited amount of capital is there a way to expand the overall profit? Can you place a combined offer which would say: each of the 4 stocks will gain at least 14% when the next quarterly reports are released. This way if 3 gained 20%, and one gained 5% you would lose, but if all gained over the specified amount you would profit. Does such a thing exist? If not is there another method of increasing gains (other than borrowing additional funds) with a fixed amount of capital? ## Answer by deftfyodor (score 2, accepted) https://quant.stackexchange.com/a/25892 It depends on the timing of the expected price movement with respect to the report time, and the timing of the report. If you can say with very high certainty that the prices will move as you suspect, then you don't need to worry about diversification- you only need to buy one at a time, and only hold the stock you expect to be appreciating most quickly at each point in time. For example, suppose each report comes out at even intervals of one hour, and price moves most quickly in the hour directly following a report. Then, you buy stock one right before the report, ride the wave up, liquidate your positions, move into stock 2, then 3, then 4. Similarly, if the reports are all released simultaneously, you can time your trades to first take a position in the stock which will adapt most quickly to the new information, then when that one slows down, on to the next. If executed correctly, the first strategy will yield a compounded return of 46%-107%- supposing, of course that all trends are predicted with perfect accuracy, which in reality is a very hard assumption to make honestly. Of course there are somewhat more sophisticated strategies if you could also hold short positions, or are aware of strong correlations of your predicted equities with other stocks.
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