Those who trade stocks on a regular basis will likely have come across the term “it is better to travel than arrive”. On the surface it seems a little bizarre, suggesting that investors are better off jumping ship before an expected announcement which could impact a company share price. However, there is a sensible angle to this quote which will perfectly illustrate why it is better to travel than arrive.
Rumours, counter rumours and more rumours
As we have mentioned on numerous occasions, if you view stock markets as information exchanges then they will take into account public information and “inside information”. Whether we like it or not, inside information does find its way into the stock market and can impact the price of company shares on a regular basis. The regulators will suggest this is wrong, the politicians will suggest this does not happen but just take a look at the performance of share prices just prior to potentially game changing announcements.
So, why is a better to travel than arrive?
When information regarding a potentially game changing announcement/development for a company quoted on the stock market begins to leak out, the share price will start to react and build up a head of steam. Initially there will be rumours and counter rumours and not all parties will be aware of exactly what is going on behind-the-scenes. This can prompt the creation of “factual rumours” which are in reality incorrect and misleading. However, even ill-conceived rumours can and do regularly impact share prices.
As the rumours and counter rumours begin to build this can have a significant impact on the share price and sometimes the momentum can push it above and beyond what would be deemed a fair value when the eventual announcement is released. It is human nature to be over pessimistic and overoptimistic and these two traits are perfectly illustrated on the stock market. So, this is why it is better to travel than arrive.
Sell into momentum
Each time you buy a share you should have a perceived “fair value” in mind and if the price goes above and beyond this value then you should consider banking a profit. The idea that you sell the shares before the expected announcement, and rumoured news, ensures that you bank a profit. When the announcement is finally made it could either be better or worse than expected but the likelihood is it will prompt at least an element of profit-taking.
As the day traders and short-term speculators look to bank profits, what began as relatively small profit-taking can very quickly lead to a one-way slide. There may be additional risks to any developments which have not been considered, the share price may have got beyond reasonable value and very quickly the buyers can disappear and sellers emerge in numbers.
Conclusion
There will be occasions where a share price will push ahead after an announcement but there will also be many occasions where profit takers immediately take control. It can sometimes be difficult to trade in relatively small company shares once an announcement has made and the seller’s take over. So, in reality this is why many people enjoy the journey but will very often sell their shares before they arrive – arrive being the much rumoured announcement.