Why investors need to read between the lines of rumour and news

Here's an investing rule for you: Be wary of pearls of wisdom. Any "pearl" that can be summed up in six words or less might have the benefit of making life easier, but often that's about it, and following these bits of conventional wisdom too closely can be a recipe for disappointment.

Take "Buy low, sell high," for instance. Sure, it sounds good. But what's your definition of low? What do you mean by high? There might be a higher to follow your selling, or a lower to follow your buying.

Another adage often bandied about in stock trading is "Buy the rumour, sell the news." It basically assumes that asset prices will rise in anticipation of news developments (the rumour phase), and decline following news developments as investors take their profits. So the time to "get in" is during the rumour phase, when there's high upside to news developments.
In a world of nearly instantaneous news dissemination, of course, the lag between a rumour and a bit of actual news is getting smaller all the time. What seems like rumour soon becomes noise, which after a while starts to seem like news. The media cover the noise, which isn't really news. Even when the underlying rumour has been largely discredited or undermined by other developments, the noise can persist, and continue to have an impact on asset prices.

Read more:

• How to make money when the markets are falling
• US debt, Japanese yen and gold could be the 3 best ‘safe havens’
• The efficient market hypothesis – reality or outdated
• Investor Strategy for Gold Trading
• Differences Between Stocks and Bonds