There are many adages to ‘help’ investors use the news in their investing decisions. I use ‘help’ in inverted commas because some of these adages should be treated with caution, especially as successful investors should aim to build a well diversified portfolio which is balanced in line with their overall target, rather than one that is swayed by individual events.
Still, it’s worth being familiar with some of the suggestions out there.
‘Buy the rumour, sell the news’, for example, which suggests investors should follow market sentiment, which can be reversed by news that confirms any rumour. ‘Buy when there is blood on the street’ is another, which suggests bad news can be a positive signal.
More general sentiment indicators look beyond the individual news announcements from companies. One of my favourites is the magazine cover indicator which states that once the news is on the cover of The Economist, everyone knows and the markets have already priced it in.
Studies have also attempted to guide investors to the right way to play the news. In 2022 a team from Toronto studied over 21m news articles associated with 9000 listed companies and found that stock returns are significantly related to news flow frequency.
The truth is that the best way to integrate financial reporting into your investment strategy is by taking the facts provided by the updates and building them into your understanding of the company. But the problem is that interpreting what companies are telling you in their news announcements is not always as easy as it should be.
In December, Mark wrote a brilliant article translating the language of the market. It was a bit tongue in cheek (“Adjusted EBITDA = a made-up positive number”) but it spoke to that important point about financial reporting. Since then we’ve had plenty of requests for a more serious guide to interpreting market lingo.
It’s a task that we will build on as we head towards results season, using our Academy as a home for our various guides on interpreting company news. But to kick off I thought I would collect some of the insights we have discovered over the years about the way to play market news.
Results season looms
January has started bizarrely quietly, with very few company announcements…
