Have you ever heard the saying “buy the rumor, sell the news?” I hadn’t heard it before until Dave said it on an episode of the Investing for Beginners Podcast, but the more that I thought about it, it seems like that’s the exact philosophy that so many people seem to have nowadays.
If you really think about it, that’s what a lot of people seem to be doing when they’re buying stock.
For instance, Fast Money, a show on CNBC, ends every show by saying what their ‘Final Trade’ is going to be.
The term ‘Trade’ in itself implies that you are treating that decision, regardless if you’re buying or selling, as a short-term decision.
CNBC even has a show where they only talk about trading options which is even more of a risky move where you’re betting that the stock will either increase or decrease by a certain amount by a certain date.
You have the option to place a put, where you think the stock will fall, or a call, where you’re betting that the stock price will rise, by a specified date. Again, this is extremely short-term thinking.
While this short-term mindset really seems to be the talk of the town lately, and I think it’s because people think that they’re savvy and can outperform the market (Spoiler, you probably can’t), I think it’s a good thing for us value investors.
Apps like Robinhood where there is commission-free trading really create an environment that makes people less “attached” to their stocks and are very quick to pull the trigger on buying and selling.
While I think that Robinhood definitely does have some good things, I think that it also has a lot of bad that come with it and that it somewhat is an environment that fosters and creates some bad habits with free trades.
This mentality of short-term investing really goes hand in hand with buying the rumor and selling the news.
Essentially, when an investor does this, they’re speculating about what might happen with a stock and then buying into the stock, hoping that prices will really increase and then when news comes out about that stock, they will ride it throughout the process and then sell as things start to slow down a bit.
An example of this that really sticks out to me is with the trade wars. People might buy a tech stock, say at $170/share, that’s heavily dependent no China when the stock has dropped a lot and they’re hearing rumors that the trade wars might end.
Then, news will break that trade war discussions are continuing very well or that tariffs have been delayed. Boom! The stock immediately jumps back up to $200, right where it was before the trade war discussions. And at that point the stock is sold for a profit of $30/share.
Doesn’t that sound like a pretty easy plan? In theory yes, but what if that stock continues to rise and now is around $230? Yes, you made $30/share, but you also missed out on an extra $30/share from selling to early. Or, what if you bought on rumors when the stock hit $200 and then sold it at $170?
Does this situation sound at all familiar? If you’re a shareholder of Apple, I bet that it does…
You see, rumors and news are different, but they’re also somewhat the same…Buying the rumor and selling the news is a very dangerous game. It’s 100% speculation and luck.
I don’t know about you, but that’s not a practice that I like to participate in, and it’s not a practice that Andrew and Dave teach.
Value investing is essentially when you find an under valued stock at a great price and you think that it will provide you a great long-term potential to buy and hold to reap the benefits.
It’s the process of really basing your investing on some financially based ratios and on some qualitative thoughts about the company, and then investing in it for the long-run.
One of my favorite quotes ever to portray this is by Warren Buffett where he says, “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”
That is such an easy rule of thumb to live by and really helps to put things into perspective when you’re looking at a company.
If Warren Buffett is only looking at buying things toddy that he’s confident will still be good investments for at least the next 10 years, do you think he is buying the rumor and selling the news? I don’t.
In today’s world, so many people are buying the rumor and selling the news that you’re almost the outcast if you’re not doing that. So, don’t do it. Be the outcast. Andrew had Tobias Carlisle on the podcast and they talked about the importance of being a contrarian to your environment and how a lot of people will zig when they should zag, and zag when they should zig.
When you buy the rumor and sell the news, I think this is exactly what you are doing.
You might think that you’re “one-upping” your fellow investors because you have some inside scoop, but do you actually? Likely you’re just reading about it from an online publisher where literally every other person can read that same article.
If that’s how you’re finding your rumors then guess what, it’s not a rumor, it’s quite literally already the news.
We live in a day where investing in your long-term future is actually the zig to everyone else’s zag. I urge you to stick to your roots and your principles of looking for very sound, quality investments that check all of your quantitative and qualitative requirements and as always, investing with a wide margin of safety.
I know that this might not seem as flashy as what some of your peers are doing, but do you know what I think is flashy? Not losing money.