Buy the Rumor , Sell the Fact

Does this heading sound familiar to you ? You must have heard it many times … ( I quoted this in my previous post too )

Please note that the statement is to sell the fact , not buy the fact. Implicit in this statement is the assumption that the rumor is bullish. Rumors , however , could be bearish too.

Bullish rumors are what we base our buying on. Once the bullish fact is known , then it is too late to buy because the bullish news would have been factored into the stock price. Instead it should be sold. The concept , then , is to buy in anticipation of bullish news and sell when the news is out. I used to monitor pre-earnings in some of my favorite stock picks. It has to be a fast game …

If the rumor you heard is bearish , leading to actual bearish news , then the statement , buy the rumor and sell the fact , does not hold. In fact , there is a greater danger to your trading position if you buy on bearish rumors and sell on bearish news. Markets have a tendency to go down a lot further and a lot faster than they go up. This is like theory of gravity. With this action , it would be foolish to establish a long position in anticipation of a bearish rumor becoming a fact. I would never play this game …

To establish a short position in anticipation of covering the short when a bearish rumor turns to fact is a better strategy , but may not by much. The risk with this strategy is great. Firstly , you do not know what the market has already discounted before the rumor becomes fact. This problem is inherent in all rumors. Secondly , there is a chance , slim though it might be , that the market you are interested in might even rally on the bearish rumor becoming fact. This would be attributed to the fact that the established shorts would use the bearish news as an opportunity to pull in their shorts.

There is great difficulty in trading based on rumors. Best idea is do nothing with rumors and watch very carefully when the facts come out … Do you agree ?