There are countless sayings and wisdoms in the stock market world that should help investors achieve their personal investment goals. However, investors should not take every piece of wisdom to heart.
• Is the trend really a friend?
• Not all stock market jargon proverbs are reliable
• Supposed stock market wisdom checked
Anyone who deals with the stock market and the capital market will automatically come across one or two supposed stock market wisdom sooner or later. But what is behind the seemingly clever sayings and which wisdom has universal justification?
“Sell in May and go away”
The most famous saying in stock market jargon is: “Sell in May and turn your back on the stock market.” This saying is based on the assumption that prices will plummet, especially from May onwards. Although there is also a so-called summer slump on the stock exchanges, i.e. fewer IPOs and lower trading volumes, this has no direct impact on average prices.
Furthermore, assuming Nobel Prize winner Eugene Fama’s market efficiency hypothesis, this saying cannot fundamentally lead to success, as the wisdom would otherwise be implemented by every investor. Because as soon as a special strategy on the capital market allowed an excess return to be achieved, this would be adopted by countless traders. This means that all profits to be made would be lost within a very short period of time.
However, investors who still want to sell their shares in May should follow the entire saying. “Sell in May and go away, but remember to come back in September”.
“The trend is your friend”
Securities always move in a certain trend on the stock market. There is a fundamental assumption that stocks that have risen or fallen in the past will continue to rise or fall in the future.
Whether the prevailing upward, downward or sideways trend is really the investor’s friend depends of course on the individual market positioning. Because one thing is clear – what the long-only investor is happy about is what the short seller is annoyed about!
“Never grab a falling knife”
“Never catch a falling knife” is one of the most famous stock market sayings in English. This saying is particularly used when a security is in extreme correction mode and no investor wants to place a buy order anymore for fear that the stock will fall even lower.
However, real stock market professionals also know that you can catch a falling knife by the handle and not just the blade. In principle, every long-term investor should only invest in companies that have a solid balance sheet and an excellent business model. Because so-called “trap angel investments” in particular involve considerable risks.
“Buy on bad news, sell on good news”
Investors who “buy on bad news and sell on good news” either believe they are smarter than the market as a whole or have mastered an art that is considered almost impossible to master.
Even if it is fundamentally more than obvious to act countercyclically on the capital market, it makes little sense in the long term to just wait for bad news and then give your broker a buy order. Investors who only buy stocks based on bad company news are making very dangerous bets. This supposed wisdom also says the complete opposite of – “The trend is your friend” and “Never catch a falling knife”.
“Buy the rumor, sell the fact”
“Buy on rumors, sell on facts” is the stock market saying that serious investors use to follow the path of speculators. Investors who have acquired larger positions in a company based on false rumors only “sell when facts” result in severe price losses.
“Political stock exchanges have short legs”
Daily stock price movements in the stock market are influenced by countless factors and circumstances. In addition to the economic situation, the exchange rate level, the interest rate level and company news, major political events, such as Brexit, also of course have an impact on the capital market.
In the long term, despite all the short-term uncertainty factors, only the current and expected future cash flows or profits of the company count on the stock market. For this reason, all other circumstances have relatively “short legs” by nature.
“No one has ever died from taking profits.”
One of the most frequently used stock market proverbs is also one that, contrary to most wisdom, is most likely true. Of course, taking profits does not entail a fatal risk, only a financial one.
Investors who pursue a long-term strategy in the stock market should not sell a company stake just because it did well. Because investors who constantly realize the price gains they have achieved quickly come across a crucial problem: reinvesting their capital. Investors who assume that they can identify a new winning stock after each profit-taking may be suffering from what is known as overconfidence bias. Nevertheless, the saying is intended to remind you that if the air gets a little thin on the stock market, you can of course sell at any time and thus get your sheep out of the way.
“Limit losses and let profits run”
In contrast to the previous saying, long-term investors should better take this wisdom to heart, because it seems to be the custom, especially among private investors, to create a veritable cemetery with so-called deposit corpses in their own portfolio. An investment that was only intended as short-term speculation often becomes a long-term investment.
Investors who let their loser stocks stay in their portfolio forever, based on the motto: Dum spiro spero, and hope for a quick turnaround, are not only missing out on countless new opportunities on the capital market, but are also indirectly subsidizing what is probably very incompetent management and a poor business model.
“The market is always right”
The very controversial saying: “The market is always right” divides the vast majority of investors into two groups of supporters and opponents of the market efficiency hypothesis. While Nobel Prize winner Eugene Fama would of course immediately endorse this claim, some active fund managers would certainly have problems with the statement.
In principle, however, one can assume that the share prices of the large global blue-chip companies always behave in a highly information-efficient manner.
“Back and forth makes your pocket empty”
After a series of sensible and less sensible stock market wisdom, the saying, “back and forth makes your pocket empty”, finally describes a circumstance that applies to every investor without exception, except for highly profitable traders. Frequent transactions on the stock market not only cost a lot of money, they also demonstrably reduce long-term performance.
Pierre Bonnet / finanzen.net
Image sources: Konstantin Ivshin / Shutterstock.com, Andy Dean Photography / Shutterstock.com