IF SUCCESSFUL INVESTING was simply about doing your homework, then we’d all be rich. Truth be told, it’s not how skillfully you interpret information, but how you deal with the lack of it that really matters. To that end, I try to react to the market, not predict it’s every move. Regardless, if you’re buying or selling, I’m from the school that says trade first and ask questions later.
When it comes to making a trade, it’s human instinct to want certainty. I’m selling XYZ because it released poor earnings. I’m buying XYZ because its new product is in demand. The only problem: Markets anticipate news, rather than reflect it. By the time the “news” is out, the real move in the stock has likely already occurred.
So while we might crave certainty in our trades, we’re never going to get it. After all, that’s why it’s called speculation. Although it seems reckless, you’ve got to get comfortable with the idea of not always knowing why a particular stock is moving. If you’re always waiting for the headlines to confirm a market move, how can you ever expect to beat the herd?
What matters isn’t why a stock is moving, but that it’s moving at all. And whether you’re getting in or getting out, training yourself to react without perfect information is tougher than it seems. Instinctively, we want to ask questions, understand the facts and get the story. But to a trader, the stock is the story. A market move has significance whether or not it’s accompanied by a headline in the New York Times.
For example, let’s say one day you wake up to find a stock of yours is down 10%. Even though it’s a large position, even though it’s become a losing trade, even though you’ve got other exposure to the same sector, most people won’t react, but freeze.
They’ll want to wait for the earnings or analyst report. They’ll discount the move because of low volume or recent insider buying. They’ll pay attention to the message boards and the annual report — anything and everything but the stock itself. Like deer caught in the headlights, they’ll wait until it’s too late. By the time the reason is known, the move has already been made.
I know that it’s uncomfortable to sell without knowing exactly why. But if XYZ is down 10% and I’m in a weak position, that’s all the reason I need to reduce my exposure.
Conversely, don’t let a lack of perfect information keep you from getting into an investment either. As I always point out, bull markets are built on doubt, not hope. If a stock I’ve been watching begins to perk up, I don’t need a laundry list of reasons to take a position. Buy first, and ask questions later. The market’s strength is reason enough for me.
This often leads me to seemingly risky areas of the market where the news is anything but encouraging. For example, we first started looking at beaten-up Internet stocks back in October. As the sector strengthened, so did our interest. And although it’s not an area in which I’m currently putting new money to work, it does emphasize the point that price action is the most important piece of information we’ve got. Everything else is just conversation.
We don’t trade earnings or analysts reports. When it comes to stocks, what matters are the stocks themselves. The best indicator of the market is the market. So whether I’m buying or selling, it’s the price action, and not the headlines, to which I react. And regardless of where you get your information, it’s not what you know but what you do that counts. A policy of trade first and ask questions later ensures that your biggest influence isn’t the headlines or the herd, but the market itself.
– Originally on Apr 22, 2003 by Jonathan Hoenig
