One of the most important things to consider when buying a stock (or even just continuing to hold one – i.e. NOT selling one you already own) is to be as sure as possible that there is EVEN BETTER earnings potential for said stock* than the market has currently ALREADY priced in!!!
-note: it’s also equally important that the market will soon realise this additional potential and price it in, because if it doesn’t, the price will not soon rise.
*and to be as sure as possible that there are no other stocks that have even greater soon-to-be-priced-in earnings potential (if there are, invest in those instead).
So how can you tell what the market has or hasn’t yet priced in? And if/when it will do so? Determining these two things then, should be considered mission-critical!
Essential point: market sentiment (partly—but certainly not entirely—influenced by the overall business cycle) however, can completely override this point: buyers can not only price-in all-possible potential increases in earnings, but get so excited that they also price-in future earnings that far far exceed those that can realistically ever materialise – and in extreme cases even forget/disregard the importance of earnings altogether (thereby inflating a bubble)!
Bonus: if a bubble forms, instead of simply selling-out or trying to time the top, use a trailing stoploss (set appropriately).
Later thought: essentially, what often makes the price of a stock rise isn’t even so much that investors think the earnings of a company are about to unexpectedly rise (the importance of which a great many investors aren’t even aware of in the first place – and many more can’t sensibly reason as to how this may occur) as it is solely that they think the price of the stock itself is about to rise – often simply because it’s already risen/rising and people who presumably know more than they do must surely be buying it for good reason!!! Hence rising prices often beget rising prices.
