Stock Market 101 Q&A – Buy the Rumor, Sell the News?

Stock Market 101 Q&A – Buy the Rumor, Sell the News?

Thanks to new reader Padmanabha for sending along these questions about stock investing.  I’ll do my best to answer halfway intelligently!

Q: What is the general trend when quarterly results are declared? Do people sell ahead of the declaration or post declaration? I am sure people want to make some profit and then buy back if they want to stick to the same stock.

My general observation these days is that stock prices trend days to weeks ahead of earnings announcements, so you are probably better off following the classic “buy the rumor and sell the news” strategy.

Take Facebook – it looked great until it actually started trading!

This being said, savvy long-term investors (the handful that are left in the world) are unlikely to sell shares they own before an earnings announcement on the anticipation they’ll be able to buy them back on the cheap.  They would just hang on throughout, and buy more if they feel the stock price was unfairly punished by investors.

On the other hand, if you are like the rest of the world and you’re short term trading, you absolutely want to consider selling before the news actually hits.  The way things are going, you may eventually need to sell on the rumor itself!

What does it mean by Wall Street’s expectation on a company’s stock? And how does that impact the stocks if once the expectations are set by Wall St.

Wall Street firms assign analysts to cover specific companies and stocks.  These analysts crank on a spreadsheet to come up with their projected earnings for the company next quarter and fiscal year.  If a company beats expectations, it’s stock, in theory, should rise, because this good news was (again in theory) not priced in by the market.  Though I would say trading solely based on earnings projections these days is a really tough game to play, as stock prices are adjusting well before that quarterly earnings release.

If you are investing in a stock for the long run, you probably don’t care what analysts have projected for the next quarter.  If a company underperforms in the short term, that may provide you with a more favorable price to load up on.  And remember that analysts rarely project beyond the next quarter or fiscal year – Wall St does not care about the long run today!

Could you recommend me some reading material around stocks?

Jack Schwager’s Market Wizards books are excellent.  They are more trading focused, but the whole world trades these days, so they are probably as relevant as ever.

The Bible on stock market investing is Benjamin Graham’s The Intelligent Investor (Warren Buffett cites a heavy Graham influence in his stock market philosophy).  Peter Lynch’s books are also good ones focused on stocks, though I’m not sure if his strategy would play today.

Check out Jim Rogers’ Investment Biker, Adventure Capitalist, and Hot Commodities for entertaining and insightful reading from The Man himself.

Marc Faber’s Tomorrow’s Gold is excellent as well.  As is Trader Vic by Victor Sperandeo.

Have a favorite of your own?  Leave a comment below –  I’m leaving out a bunch of good ones!