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Selldown Despite Good Profit

The question upon every quarterly result season always revolve around why companies get sell down despite registering good profit growth. The reasons can be plenty but to name a few:

1. Randomness &ndash   Daily movement of share price carries more noise than signal so the movement could be totally random and possibly has nothing to do with the results at all.
2. Optionality &ndash Investors are constantly comparing investments with one another. The selldown could mean investors found another investment that offers a better opportunity than ones they currently hold.
3. Take profit &ndash Similar to 2nd point, depending on individual decision-making process, some decide it is best to take profit upon quarterly release.
4. Feedback loop &ndash Some decide to sell by following the market which causes a selldown that triggers even more selldown due to cut loss rules.
5. Illiquidity &ndash   Low volume on buy queue can create a big selldown effect when sell side is price insensitive.
6. Market expectation &ndash Selldown happens when profit growth fails to exceed the high market expectation. Same as when a narrow than expected losses on a poor performing stock can create a sudden surge in price.
7. Fundamentals &ndash Stock can register good growth yet disappoint the market when their return fails to cover the cost of capital, which destroy shareholder value.

It is impossible to pinpoint the exact reason for the selldown and most of the time, it can be many. But what&rsquo s important is never let the market movement affect you decision making process. Short term share price movement tells you nothing about the business. And you don&rsquo t need to answer for the price others are selling. The market is there to serve you not instruct you. So exercise your independent thinking and stick to what you know.