buy the rumor, sell the fact

[...]... based on anxiety Remember that one of the tragedies of Enron was that employees who had put most of their retirement savings in company stock were left with nothing. Their guts didn’t warn them. So the gut is fallible 13 14 BUY THE RUMOR, SELL THE FACT Remember also that if you’re trying to beat the market, then you are basically trying to be right while other people are wrong. That’s a very dif... The theory in this case also applies to individual stocks. For a stock to continue to climb in price, there must be ready buyers, waiting on the side lines, who might be expressing skepticism. Watch the media and analysts If no one is offering any caveats about a company, it’s at the top of every analysts’ rankings, and it’s gone through a major price explosion over the 19 20 BUY THE RUMOR, SELL THE FACT last few months, then the stock is probably played out. Any investor who... reasonable price, you might well decide to sell it if, at quarterly checkup, it’s pushing 20 times earnings. Pretend that you don’t own the stock and that your broker has just suggested buying in at 20 times earnings. Would you take his advice? If not, then get rid of it, because the stock has probably run 17 18 BUY THE RUMOR, SELL THE FACT out of upside. That doesn’t mean that the stock is going to collapse tomor row or even in the next few months. It might only mean that its period of... earnings. The typical Davis New York Venture Fund holding trades at 16.5 times earnings, and its portfolio has earned 16.4 percent since 1976. The S&P 500, even in the depressed conditions of early 2003, traded at 28 times trailing 12month earnings 3 4 BUY THE RUMOR, SELL THE FACT Like the index they strive to beat, smallcap stocks make up an insignif icant portion of these portfolios. ... because a typhoon in southeast Asia delayed shipment of some vital widget 5 6 BUY THE RUMOR, SELL THE FACT that threatens the entire enterprise. An employee can keep life and work separate. Entrepreneurs can’t do that Another entrepreneur, second to Gates in terms of personal wealth, illustrates the value of diversified investing in the very structure of the company he controls. Sure, Warren Buffett is rich because he owns a lot of... don’t be afraid to diversify. The point to owning a lot of stocks is that they won’t all be going up or down at the same time. On the upside, that means that the losers will eat into the overall return a bit. On the downside, the winners will help to prevent catastrophic loss. Sometimes the market will rule and even a welldiversified portfolio will move entirely in one direc tion or the other. But watch the financial report on the evening news on a... and turn south. The confident traders, of course, will argue that while they might indeed endure some losses as the trend starts its downward turn, they will find a way to sell the market before they have lost all the gains they made on the way up But consider this argument: if you have to wait for trends to establish themselves before you invest, you might miss out on all the best gains. A... dips in major indexes like the S&P 500, which fell from 1190 to 950 in the space of a month, well below its 20month average. The Wall of Worry cau tions that such dips aren’t tantamount to the beginning of a bear market. In 1998 and 1999, the markets recovered. The bears that caused the sell off might even be a reason for the recovery Think of it this way: There’s only so much investable money in the world. If none of it is sitting on the sidelines, then the market can’t go up... world. If none of it is sitting on the sidelines, then the market can’t go up any farther. Without the Wall of Worry, all investors would be fully invested (a result of nobody being worried about the market), and there would be no sideline money to drive prices higher. When the market is mostly full of optimists, a comparatively slight bit of selling pressure can temporarily cause a mild panic and downturn The theory is nothing, of course, without some fundamental backing,... it’s that you can’t afford such a large investment in that stock, fine. If it’s that the fundamentals have changed, fine. But if you’re just spooked, then calm down Beware the Triple Witching Day The Triple Witching Day is as mysterious as it sounds. On the third Friday of every month, equity and index options (securities that represent the right to buy or sell stocks at a given time and price) expire. The thinking goes that the major institutions that own these options all have to rebalance their . h0" alt="" BUY THE RUMOR, SELL THE FACT This page intentionally left blank. BUY THE RUMOR, SELL THE FACT 85 Maxims of Investing and What They Really Mean Michael Maiello McGraw-Hill New. 12-month earnings. 3 4 B UY THE RUMOR , SELL THE FACT Like the index they strive to beat, small-cap stocks make up an insignif- icant portion of these portfolios. Just 3.2 percent of the. 75 Buy the Dips 77 Buy the Rumor, Sell the Fact 79 Buy and Hold 81 Bulls and Bears Make Money, but Pigs Get Slaughtered 83 Buy When There Is Blood on the Street 85 Bear Markets Last About