There is a saying in investment circles “It’s better to travel than arrive” which sounds a little bizarre to say the least. However, if you dig below the surface you begin to understand exactly what it means.
Buy on rumours, sell on facts
Those who follow stock markets will be well aware of “suspicious” share price movements which often occur prior to big announcements. While much has been done to stamp out insider-trading in recent years the fact is it is still rife. There are suspicious share price movements on a daily basis where there is little public information to justify the move. Then, lo and behold, just a few days later a big announcement comes out to justify the movement. Hey presto, the cat is out of the bag!
Takeover rumours
In the vast majority of cases, although not all, takeovers tend to involve companies which have hit troubled times but still offer good long-term value. Very often prior to some kind of takeover activity the share price would appear to be in freefall and then suddenly stop! As the buyers and sellers balance themselves out, stock will then be in relatively short supply squeezing the share price higher for “no apparent reason”. Then all of a sudden, the company announces a takeover approach which it is considering.
Most rumours are only partially true (if at all)
The vast majority of rumours in the stock market, whether positive or negative, rarely emerge in their full glory. While a company may well have received an informal takeover approach this does not warrant an announcement to shareholders – nothing is certain. However, in the early days when the informal approach may well be considered by the board of directors, news can leak out and the share price rise. Short-term traders will very quickly become bored if there is a lack of news and look to bank a profit.
There may never be any formal confirmation of the takeover approach so this is a prime example of rumours which move share prices yet never actually materialise into the public domain.
It’s better to travel than arrive
So, it is perhaps a little easier to understand the saying “It’s better to travel than arrive” when considering the amount of rumours which turn out to be unfounded yet can significantly move share prices in a short space of time. In the event that a takeover rumour turns out to be correct and is formally announced by the company in question it is likely that the vast majority of the potential share price rise has already occurred. In many cases this will not stop less experienced short-term traders jumping on the bandwagon looking at arbitrage situations, giving those who bought in on the rumours the chance to bail out.
In many ways the best time to sell a large chunk of shares is just prior to the top of the market before the buyers disappear and the sellers emerge from the shadows. Consequently, where the long-term prospects for a company are still fairly positive the best time to buy shares is when all around you have a downbeat short-term opinion. In these situations there will be shares aplenty to buy, no need to rush in but when the shares rebound this can happen very quickly. Enjoy the ride, but remember to get off before the last stop.