Buy the Rumor and Sell the News

Dear Mr. Market:

The stock market has provided many sayings and memorable catchphrases that people tend to regurgitate ; some have merit and some are just garbage.

If you’re a regular reader of Dear Mr. Market, or a client of My Portfolio Guide, LLC, you’ll know that our all-time favorite is “The four most dangerous words in investing are …This time it’s different” -Sir John Templeton. Here are some other all-time adages that you’ve undoubtedly heard:

Buy low sell high” Uh…yeah, but easier said than done.

“The trend is your friend” Sure….until it’s not!

“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks” -John Bogle

“Markets can stay irrational longer than you can stay solvent” -John Maynard Keynes

So…what does “buy the rumor and sell the news” mean? You probably know that the stock market is full of speculation, great stories, and chock-full of hidden nuggets as well as potential land mines. Even if you’re not an experienced investor or trader, at some point you’ll figure out that by the time your neighbor (you know the guy who never loses and is always up) tells you about a stock tip…the ink on the newspaper is already dry and that idea is likely stale.

A stock, asset class, or any investment for that matter, has the ability to run higher on anticipation of some new development or trend taking place. This is the “rumor” part of the adage we’re talking about today. The rise upwards can be gradual as more people grab hold of it and disseminate information, for which as you know, today there is no shortage of with the internet and social media etc. Then, once (if) a meaningful catalyst materializes, the increase in the investment can truly spike on actual news. Conversely, this is when “news” can bite you in the butt and therefore the back half of this adage also proves to be correct (sell the news). For example, how many times have you learned that a company reports fantastic earnings but for some reason the stock gets punished the next day? Often this result is simply due to the fact that the good news has already been “baked into the cake” and now profit taking ensues.

For the better part of 2019 there were several instances of this phenomena with news around China tariffs and proverbial “trade wars”. We won’t rehash the ups and downs of that time period in the market but if you were in reactionary mode throughout, you would be a head case and likely make poorly timed decisions.

For a more granular decision and how it relates to companies reporting earnings, if you’re not a long-term holder of a stock and buy one leading into an earnings announcement, it often makes sense to trim or sell your position that has risen in anticipation of something positive. Anything can happen once the actual announcement is digested and as we’ve all seen, sometimes it defies common sense or logic. Additionally, if you see one of your positions that has been on the chopping block for some time and shown very little signs of life, it can make sense to take advantage of a bounce shortly after it occurs (otherwise you will run the risk of truly becoming a long-term holder and married to it!). If it continues to run higher, don’t kick yourself since you’ve taken some profit and if it drops again, you at least exercised what few people do with consistency and that is having a sell discipline.

Lastly, this brings us to today and what we’ve done with a certain investment. As part of several of our portfolio models we had allocated a bit of our international exposure towards Japan. Japanese stocks had endured 20 plus years of underperformance. The Nikkei Stock Index peaked to 38,915 on December 29, 1989 and fell to around 8,000 by November of 2011. This year we’ve seen it claw it’s way back over 29,000. From August 20, 2021 where it traded at 27,100 to today’s close at 29,110, we felt it was time to take some chips off the table. Today’s announcement of Prime Minister Yoshihide Suga stepping down provided the news to sell on a nice bounce. At one time Japan offered some attractive valuations relative to our domestic markets but now is arguably a bit ahead of itself again at just over 31 times earnings. We’ll look for a new horse to ride but for the time being…enjoy the holiday weekend and have a great Labor Day!

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