Fact or Fiction: Buy The Rumor, Sell The News

Making your own picks with stock or crypto investments requires research so you can have knowledge to make an educated decision to choose which companies to buy. Some of this research is ongoing to keep up with news and current events to figure out how they will affect your investments. When reading through news websites you will often stumble upon big news that can drastically affect the value of specific assets, so it’s important to understand how you should react to news.

You may have heard the investment expression before: “Buy the rumor, sell the news”. In most cases in my experience, this statement has turned out to be true, but there are some important exceptions I’ll mention later in this post. If you read stock and investment news on a regular basis, you’ll often see articles that may lead you to believe you should buy or sell a specific stock, but your natural instinct reacting to this news can be completely wrong more often than not.

News Timeline & Investor Habits

Why would I say your natural instinct will be wrong more often than not? There’s nothing wrong with your intuition, but I can make that statement with confidence because of time. Time is the key ingredient when it comes to stock and cryptocurrency-based news and how you should react to it. In most cases, each news article you read will most likely be old. “Old” here can be one hour ago or even more. When the news isn’t brand new within the past couple of minutes, you’re working off of old information. By the time you react to that information, it’s usually too late to make the smart play with your investment.

Consider the goals and habits of all investors. The basic idea is that you want to buy when the price is low and sell when the price is higher. In order to sell your asset, there also has to be a buyer willing to pay the price you’re selling at.

During times of rapid price increases or decreases, supply and demand are usually off balance, so there may not always be a buyer available for each seller. One way to help ensure there will be a buyer is to use a crystal ball and see the future. Since that’s not possible, the next best thing is to try to predict the news and make your move early. This is what most investors attempt to do and why making moves from news articles are often too late – when you come along to buy and the price is already shooting up, you’re just buying from one of the early buyers and giving them their profit.

Once news has made its way around the investment community, the react fades away and people try to book profits from their trade. This reaction usually sends the asset price in the opposite of the anticipated direction. This is why you’ll see news, make a purchase and then almost immediately start to suffer losses from the investment. Your instinct isn’t wrong but your timing to enter the market is off.

Stock & Crypto Rumors

News articles will usually only discuss events that have already happened, although a small amount of them can be speculation about future events if they are fairly major events. Once those are released to the public, it’s usually too late to react to that information, so how do you actually find out about the news before it’s released to the public? You have to really spend a lot of time and effort and track down rumors – they won’t just come to you.

Social media and sites like Reddit can be an invaluable source of rumor information. Find stock and cryptocurrency related discussion groups on these sites. If possible, find groups specifically dedicated to investments for the company you’re interested in trading, but if you can’t find a specific group for yours then it’s okay to follow groups centered on the entire market instead. Rumors and other useful info will often be shared in these communities. Using this knowledge wisely can help you get into a trade early so you can make a quick exit for a nice profit when the news becomes public knowledge.

When it comes to rumors, you really have to be careful about how you react to the info you receive. Not every rumor is true. Some people on the internet probably give out fake information just for the fun of it too. Always consider the source of the rumor to decide whether you can trust it or not. Is the person spreading the rumor someone that has shared info in the past and was their previous info true? Do they have a job that would give them access to information that the general public doesn’t know?

Major News Headlines

Big news events can obviously have a major effect on market prices and being on the right side of these big moves can provide very fast profits. However, trying to navigate them blindly will often lead to big losses. With any piece of news, always consider whether people knew about it ahead of time.

If rumors circulate for a period of time before the news, investors have already made moves to anticipate the news release (this is the case more often than not). When news is actually brand new and breaking for the first time, you may be able to get in on the action if you make your move fast (within 5-10 minutes of the news being released).

New information about an investment can be positive or negative, but you should always try to look deeper to figure out what it means for the price of the asset. Some news can briefly change the price of an asset but then it quickly reverts back to normal because the news wasn’t really that game changing. Other news can completely upend the market and send the asset price on a one-way trip higher or lower. Always consider what kind of news you’re reading and how it will ultimately change the future success of the company.

Market Event Pricing

When you first get into stock and cryptocurrency trading, nothing makes sense. When you expect the price to go up, it goes down, and vice versa. You try to do the opposite next time and lose again. It can sometimes seem like the entire market is solely working to try to make you lose money. It’s easy to think that you’re the problem and you’re simply not good at trading, but that likely isn’t the case. The most likely problem is that you’re simply reacting at the wrong time or making decisions without all of the knowledge.

In the investing world, you have institutional and professional traders that do this for a living. They will consume all available information about an asset and use that to anticipate what will happen in the future. This behavior causes the market to often price in events before they actually happen.

At the time of this writing (early May 2022), inflation is surging and a recession is predicted to be on the horizon. Cash will typically outperform investments during a recession, so the market has already reacted to this news and priced in the upcoming events. Once this is fully priced in and the actual event happens, you probably won’t see a massive surge in pricing unless the prediction turned out to be wrong.

With that information in mind, you should always consider other investors to be at least one step ahead of the basic knowledge that news is circulating at any given moment. Unless you can do the same, you shouldn’t make quick reactions to investment news because it’s probably already too late.