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Should Investors ‘Buy the Rumor, Sell the News’?

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.

Updated 2/22/2020

I feel like it was just yesterday when I was talking about the mindset of buy the rumor, sell the news, but look where we are now and it’s more prevalent than ever.  When I say the word ‘coronavirus’ what do you think of?

Some people are probably feeling an emotion of being scared, some are probably very sad about those being affected, some people are probably wondering about the uncertainty in the stock market…. Well guess what – I am all three of those. 

Now I’ll be honest, I’m not that nervous or scared about the impact to myself, but you never know, I guess.  The other two feelings are much stronger for me.  But do you know what I’m also thinking about? 

OPPORTUNITIES!

When Apple comes out and says something like how they don’t expect their revenue numbers to be great because of the coronavirus like they did in this CNBC article do you know what I’m going to do?

I’m going to sit there, laying low and stocking my prey like I’m a freaking cheetah in the grass watching that antelope…and then when the stock gets irrationally pounded…. I’m going to…

It’s almost like taking candy from a baby!  The media is so hyped up by looking at the short-term outlook, and I agree that it can be easy to do that at times, that if you can simply just stick to a long-term view then you’re going to give yourself a fantastic opportunity to find great companies at great prices! 

Remember when all of the trade war/tariff stuff was going on?  Man, that was like 100 years ago!  Well, guess what, the same thing happened to Apple then, too…

Would’ve really stunk if you sold during the trade war scares when the stock dropped significantly because of a short-term issue.  But if you used this temporary scare for a purchasing opportunity then you loved it!

That’s really what this all boils down to – anytime that some sort of world scare arises like this, whether it’s trade wars, sickness, war, anything at all – if you do not think that material nature of a business is going to change, then stay patient and wait for some of the valuations of these companies that you like to drop.

I use Apple as my prime example because I never thought that the trade war was going to last forever, just as I don’t think the downtrend in revenue for the coronavirus will be a long-term issue.  I legitimately hope that their revenue misses in Q2 this year and the stock drops significantly. 

I’m not selling any stock that I do have, but I am letting some of my “opportunity fund”, which is really just some cash that I always have for this sort of circumstance, accumulate a bit higher than normal to see if I can find some legitimate bargains. 

If it turns out to be nothing then who cares – I lost a few months in the market for a small percentage of my portfolio, but if Apple drops over 17% like it did during the trade war then maybe I can buy some more at a great value!

And just to clarify – I’m not saying that I think a 17% drop in Apple would make it a great value – but they’re just my poster child for this example.  I always have a “wish list”, which is essentially companies that I really want to have a stake in that are just overvalued, that I keep on my radar in case something like that happens. 

It’s literally just a wish list that I don’t touch or really think about unless something crazy happens in the market.

Andrew and Dave talked about this quite in depth on a recent podcast episode and Andrew really focused on the importance of making sure that we’re not being traders in these circumstances.  For instance, don’t sell all of your Apple stock at today’s price of $313 and then try to buy back in at $300.  When you’re doing that, you’re trading. 

We still need to be evaluating businesses on what they are and then creating a price where we think the value is there.

In the Value Trap Indicator that Andrew created, you have the ability to manually input some of the financials and then it tells you if the stock is a ‘strong buy, a ‘monitor’ or a ‘strong sell’.  Something that I like to do is play with the stock price and see how it changes things.  For instance, maybe a stock is a ‘monitor’ at a price of $250/share, but if the share price drops down to $215 then it is bumped into the ‘strong buy’ category. 

To me, that’s the value of the Value Trap Indicator.  I can use it however I want to and maneuver the numbers to not only tell me the current stance of the business but also to show me at what point does it make sense for me to consider getting a piece of that pie!

Another topic that Andrew and Dave touched on was Tesla, and while I don’t want to go too far in the weeds with my thoughts on Tesla, I think I’m just going to recommend that you listen to what they have to say – they’re much nicer than I would be, let’s just say that.

Tesla has been an incredible performer in the market over the past few years, especially in the last few months.  I mean, it’s up over 350% in the last 5 months – that’s outrageous.  And while it would be great to be an investor in that timeframe, I would be terrified that it can fall just as fast (or faster) than it rose. 

I completely understand while people invest in Tesla – you’re buying into the hype and the promise of the future – and there’s nothing wrong with that as long as you understand your risks.

I legitimately believe that no investment strategy is wrong, no matter what, as long as you understand the risk/reward potential and it’s properly aligned with your goals.  If you’re 18 and want to buy Tesla and let it ride for the hell of it, do it!  If you’re 70 and want to invest all of your retirement income in Tesla, do it! 

Now do I think that someone investing in Tesla that’s retired is a good plan? 

Absolutely (bad word) not. 

I think it’s moronic to be honest.  But if you understand that it might go from $900 to $0 and you’re ok with the risk, feel free.

Personally, I don’t have the stomach for it, but that’s just me.  It kinda reminds me of Beyond Meat.  Talk about a rollercoaster…

And if you want to talk about another, current example – Virgin Galactic.  They are the most bought company at Fidelity one day this week and they really aren’t even doing what they’re planning to do – it’s just a promise at this point. 

That is the most ludicrous thing ever.  It makes my head hurt lol.  But if you want to invest a small amount into that stock just to let it ride, feel free – I can get behind it if you understand the risk/reward potential and it’s aligned with your goals.

The fact of the matter is this – if you want to buy the rumor and sell the news, you can, but by the time you’re hearing about it, you’re going to be the last person to make the move.  If some crazy reports come out about the coronavirus or that TSLA is making a new car, do you think you’re going to know first?  

Heck no!

Everyone else will.  By the time you read an article on CNBC or listen to a podcast the next day about it, it’s too late.  Stay focused on your goals of being long-term and let all these short-term people sell their asses off.  We will reap the rewards later on.