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I'm new to this forums and thought I'd start off with a quick question. Lets use Advance Auto Parts(AAP) in my example.

Lets assume you are looking into buying AAP and you do all the research you can, financial statements look good, you think to yourself people might be fixing their cars instead of buying new ones because of the economy, AAP has beaten their estimates(except one time on 5/18/2011), their ratios look better then their competitors and no red flags in general.

So you decide to buy 1000 shares of AAP for $75 a share on 1/24/2012. You start riding the gravy train and notice AAP reports their earnings before the market opens on 5/17/2012 so you check them out once they're announced. You notice they didn't beat their earnings and decide just to sell once the market opens and cash in your profit.

To your surprise AAP stock dropped from $82.10 when it closed on 5/16/2012 to 72.28 on the open(11% drop) and your investment went from $7,100 gain to a 2,720 loss.

So my general question how to avoid a case like this? Do you normally get a feeling when a company doesn't make their estimates a few days before? Like starting to see news articles about the company not going to make their estimates?

Just wondering because I just started investing for the first time and AAP was the first stock I bought because it appears undervalued. However during my research I did notice 11% drop when they missed their estimates.

Thanks, Michael

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I know this is just an example, but an individual should be very careful before putting $75,000 into one stock. Or they better have a portfolio well over $2M. Diversification is part of what helps protect you from individual stock drops. –  JoeTaxpayer Aug 1 '12 at 13:15
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Your question amounts to "how can I tell in advance that a company's share price will drop?". Clearly that can't happen, because if there was, everyone would know about it and the price would drop when the 'advance information' was available. Unless you are talking about insider trading... –  DJClayworth Aug 1 '12 at 13:35
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up vote 3 down vote accepted

The best thing to do to avoid this is not to sell as you've described. What purpose does it solve? If you're speculating, set a price at which you want to cash out and put a limit order. If you're a long term investor, then unless something fundamental has changed - why would you sell?

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Nothing fundamental has changed and in it for the long term. When you see this type of drop it can make me worried. I guess I just have to train myself to focus on the long term gains and not the short term loses. –  Michael Aug 1 '12 at 2:46
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