Buy the rumour

'Buy the rumour, sell the fact.'

This old adage is truer than most. Unfortunately, it reflects the fact that the market is driven to a greater than desirable extent by inside information. This is life and like the worlds oldest profession, it is hard to see how it will ever be fully legislated away.

What happens is that when good news is about to break, some people close to the company inevitably let it slip to their friends, or even arrange some surreptitious buying for themselves. A rumour often leaks out into the market that a particular announcement or deal is on the way. The share price rises, often accompanied by a query from the corporate plod, as people privy to the rumour get set. The company usually replies to the standard ASIC query with standard answers, to the effect that they are not aware of any reason for the rising price. 

When the good announcement finally hits the market however, (surprise, surprise) the psychology shifts. Instead of thinking, 'that's good news, let's buy the stock', the majority thinking goes more along the lines of, 'that's it, the news is out...time to take our profit'. So, apparently perversely, the stock price often falls, leaving the inexperienced punter perplexed. It must be a common occurrence for brokers to take calls from such people, asking why seemingly good news has been so poorly received by the market.

The thing to never lose sight of is that stocks do not rise or fall because they are 'good' or 'bad', they rise or fall because of an imbalance of buyers and sellers, which is caused by the perception that they will rise or fall, which in turn is somewhat, but not entirely, based upon whether they are 'good' or 'bad' value.

Sometimes when I hear some market pundit proclaiming that Westpac rose a few cents on hopes of a rate cut, when the day before they fell a few cents, I just want to yell, 'Tell the truth for goodness sake, you don't really know why it rose today! The sun was shining and more people wanted to buy than sell'.

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