Buy the rumour, sell the news

Some nuggets of wisdom around investing sound a bit risky. Buy the rumour, sell the news is one such example. It makes us think of a clever trick to get ahead of other investors. And that works in some areas, such as on the stock markets. It is not always about the news, but about who thinks they can gain an advantage by being the first to act.

In layman's terms:

Buy the rumour, sell the news (or the alternative sell the fact) refers to the phenomenon where investors buy shares based on rumours that haven't yet been confirmed. And once the news becomes official, they sell – just when more cautious investors are buying.

The news element in the stock market wisdom is therefore code for investors who actually arrive late to the party. They only decide to buy once the news is readily available, which means they are unknowingly buying their shares at too high a price.

Who said it first?

The statement itself cannot be attributed directly to one specific person. Online sources quote news articles proving that this wisdom has been going around the stock market since at least the 1950s – an era when rumours could still be launched with relative ease, without it being possible for them to be confirmed or denied.

Is that really how the stock markets operate?

There's certainly some truth behind this stock market wisdom. After all, the stock markets are not a reflection of what is happening today, but of expectations for the future. In other words, prices often don't respond to facts, but instead respond to what investors think will happen.

Sentiment and emotion often stem from common sense. As soon as rumours start to surface – about a merger, a spectacular innovation or a large contract, for example – investors start to speculate. As a result, prices start to rise before the news becomes official.

And by the time the news is announced, the element of surprise is lost. The price plateaus and may even fall. Anyone who buys at that time may end up paying the full price.

Pfizer's breakthrough around the Covid-19 vaccine

In November 2020, pharmaceutical company Pfizer announced a breakthrough in manufacturing a Covid-19 vaccine that would be 90% effective. The stock market rumour mill started turning straight away in the run-up to the official announcement: - Share prices in airlines, hotels and travel companies started to rise early in the morning.- Share prices climbed even further when the announcement came.- However, they fell again by the end of the week. Analysts suspected that a large number of investors were taking a proactive approach to the news.

Is it worth a try?

Buy the rumour, sell the news comes with no guarantee of success, but it can help you grow as an investor. But what are the potential pros and cons?

Expert insight: “Novice investors can get carried away by herd behaviour”

Geert Van Herck is a stock market expert and Chief Strategist at Keytrade Bank. He is known for his clear market analyses and accessible clarifications for private investors. Van Herck regularly shares his insights on investing, trends and strategies in blogs, webinars and the media.

"On the stock market, people often buy the rumour and sell the news. This results in a domino effect: everyone jumps in and then immediately jumps out again. We have already seen this herd behaviour in the AI race and with companies that would be contracted for defence manufacturing. Remember the cannabis stocks in the US and Novo Nordisk with its Ozempic craze. Suddenly, everyone wants the same thing at the same time. This is often followed by a downward readjustment."

"This is dangerous for inexperienced and novice investors: they get caught up in the hype and buy just when the peak is in sight. Use the average of the past 200 days as your compass and ignore the live statistics on your smartphone and stock market websites. As long as a share remains above the average, there is no cause for concern, but once it dives below, it’s time to be vigilant. And maybe even get out."

"So the message is to stay calm and not get carried away by all the commotion. This is definitely the hardest part of investing: everyone says they're in it for the long term, but at the first sign of a shift they become nervous."

Apple's Macworld Effect

Macworld Expo was an annual information technology trade fair held in the United States from 1985 to 2014. Speculation was always rife about Apple's new product launches in the run-up to the trade fair. You guessed it:

- Investors often bought Apple shares in anticipation of the announcements.

- This led to an increase in the share price before the event.

- Many investors sold their shares following the announcements, which sometimes resulted in the price dropping. This phenomenon was called the 'Macworld Effect'. An analysis showed that buying Apple shares a month before Macworld Expo and selling on the day of the keynote speech delivered a monthly gain of 3% on average.

What should you bear in mind as an investor if you're just starting out?

You don't need to be a stock market pro to benefit from this knowledge of the stock markets. Practice makes perfect. Nevertheless, we recommend that you take the following tips into account.

1. Switch off your emotions

Rumours are often seen through lots of emotion: enthusiasm, hope, doubt, greed and more. Don't let yourself be drawn in. Look at the data from an objective angle and be rational:

• How likely is it that the rumour could be true?
• What is the impact on the company's profits, strategy or reputation?

2. Separate the online buzz from the online bluster

Social media, investment forums or WhatsApp groups are often full of rumours. "They're going to be bought!" or "They're going to launch a revolutionary product!" may well sound exciting, but it's a good idea to check if there are any credible sources behind such statements. Rumours can drive prices up in the short term, but they can collapse just as quickly if the rumours turn out to be false.

3. Be aware of sudden price movements

If a share price is surging and you haven't heard anything official, there's a good chance a rumour is doing the rounds. Don't take action based on the fear of missing out, but take a moment to ask yourself:

• What's the rumour?
• Is the rumour credible?
• Is this investment a good fit for my strategy?

4. Practise with smaller amounts

If you want to act on rumours, it's best to start with a small amount. You can also limit the risks with a diversified portfolio. Look at it as a trial run to experience the effect of this stock market wisdom first-hand.

5. Don't be sorry for making a profit

If you have jumped on a rumour that turned out to be right, well done! It may now be worth considering selling (part of) your position. You don't have to cash it all in straight away, but there's no shame in making a profit. Sometimes, it even makes sense.

All eyes on NVIDIA

In 2023, artificial intelligence was a super-booming business. Companies such as NVIDIA were surfing the AI wave to the full, and this was reflected in impressive stock market numbers. Given the sky-high expectations, it came as no surprise that many investors were eagerly anticipating the announcement of NVIDIA's new quarterly figures in mid-2023. In the run-up to the actual announcement, their share value increased by as much as 10%. Yet the same day, the price began to plateau and even fell again the following day, as large numbers of investors decided to cash in their investment immediately.

From stock market wisdom to life wisdom

To sum up, Buy the rumour, sell the news is a fun way to say that speed counts on the stock market, but that critical thinking and picking up on signals is even more important. And that applies even more so today.

You should never lose sight of the bigger picture. Sometimes, the news that's announced may not necessarily be worthwhile in the short term, but it may well offer long-term growth opportunities. Consider the announcement of a new partnership or a new entry on the market. In such a case, it may be worth holding onto your shares, even after it becomes public knowledge. Observing and learning is the key to success!