Here’s an investing rule for you personally: Be wary of pearls of wisdom. Any “pearl” that may be summed up in six words or less may have the advantage of making life easier, but often that’s about this, and following these bits of conventional wisdom too closely could be a recipe for disappointment.
How to beat rate of interest uncertainty if you are investing in stocks
It’s accepted as a matter of proven fact that markets hate uncertainty. Most investors, given an option, like to know what they’re dealing with, and the smart ones (e.g. Warren Buffett) seek out firms that offer steady cash flows, a sustainable competitive advantage and the financial strength to resist storms.
Take “Buy low, sell high,” for example. Sure, it may sound good. But what’s your meaning of low? What do you mean by high? There might be a higher to follow your selling, or perhaps a lower to follow along with your buying.
Another adage often bandied about in stock trading is “Buy the rumour, sell this 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. Therefore the time to “get in” is throughout the rumour phase, when there’s high upside to news developments.
In an enormous amount of nearly instantaneous news dissemination, obviously, the lag from a rumour along with a little bit of actual news is getting smaller all the time. What seems like rumour soon becomes noise, which after a while starts to appear to be news. The media cover the noise, that isn’t really news. Even when the underlying rumour continues to be largely discredited or undermined by other developments, the noise can persist, and continue to have an affect on asset prices.
Consider the short-lived run-up in oil prices round the end of recently, when benchmark WTI briefly neared US$34 a barrel. To my mind, this is an illustration of how the lines between news, rumour and noise are getting blurrier all the time – making following old investing adages a dodgy enterprise.
If you remember, the move came amid speculation the Russians and/or the Saudis and/or the whole Organization of Petroleum Exporting Countries (OPEC) were available to production cuts to create stability to oil markets.
The source of the speculation would be a comment from Russian Oil Minister Alexander Novak on Jan. 28. He told reporters that OPEC had proposed a five-per-cent cut among major oil producers (OPEC and non-OPEC members, like Russia, included), and implied that the proposal was being led by Saudi Arabia. Or, rather, when asked whether this proposal had originate from Saudi Arabia, he didn’t refuse.
The result: a flood of reports the Saudis and Russia were going to agree on the five per cent solution, and benchmark crude prices jumped almost 10 per cent.