#risk

There is a wonderfully boring argument for how to build wealth in the stock market.

Buy a diversified collection of productive businesses. Keep buying. Reinvest the dividends. Avoid panicking. Wait a very long time.

For most individual investors, broad-market index funds make this remarkably easy.

There is only one problem.

Stock picking is fun.

Not for everybody, certainly. But for a particular kind of investor, researching individual companies scratches an itch that an index fund simply doesn't. There is a puzzle to solve. A judgment to make. A possibility that everyone else has missed something.

Maybe a company is temporarily unpopular. Maybe a promising business is buried beneath ugly quarterly numbers. Maybe the market has underestimated some technological change. Maybe you have found the proverbial $10 bill lying on the sidewalk.

And, hovering somewhere behind all that sober analysis, there is another possibility:

What if this one really takes off?

This creates a peculiar conflict.

The investor may intellectually believe that diversified, long-term investing is the more dependable path to wealth while simultaneously finding individual stocks much more interesting.

The usual solution is straightforward: suppress the second impulse.

But perhaps there is another possibility.

Instead of trying to eliminate the desire to speculate, give it a budget.

Two jobs that investing can accidentally acquire

A funny thing happened to cybersecurity company Zscaler over the past week.

The company reported earnings that beat analyst expectations. Revenue came in above forecasts. The business itself did not suddenly stop functioning. Customers did not disappear overnight. The company's products did not become obsolete.

And yet the stock promptly lost roughly a third of its value. A few days later, it changed its mind. The stock rebounded dramatically, recovering much of the decline and ending up surprisingly close to where it had started.

Looking at the chart, someone who had been away from the news might assume some major event had occurred. A scandal. A data breach. A failed acquisition. A lawsuit. Instead, much of the drama revolved around guidance.

Management's outlook for future revenue came in slightly below analyst expectations. Not catastrophically below. Not "the business is broken" below. Just below. Billions of dollars in market value evaporated anyway. Then, with relatively little new information entering the picture, billions of dollars came back.

Zscaler’s daily closing price shows the sharp post-earnings selloff and the rebound that followed.

That sequence has been stuck in my head all week.

The Strange Thing Wasn't the Drop

A stock falling after earnings is not unusual. Investors are not buying the past quarter. They are buying expectations about future quarters.