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Buy the Rumor, Sell the Fact : 85 Maxims of Investing and What They Really Mean BUY THE RUMOR, SELL THE FACT This page intentionally left blank. BUY THE RUMOR, SELL THE FACT 85 Maxims of Investing and What They Really Mean Michael Maiello McGraw­Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2004 by The McGraw­Hill Companies, Inc. All rights reserved. Manufac­ tured in the United States of America. Except as permitted under the United States Copy­ right Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior writ­ ten permission of the publisher. 0­07­144225­1 The material in this eBook also appears in the print version of this title: 0­07­142795­3. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fash­ ion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw­Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. For more information, please contact George Hoare, Special Sales, at george_hoare@mcgraw­hill.com or (212) 904­ 4069. TERMS OF USE This is a copyrighted work and The McGraw­Hill Companies, Inc. (“McGraw­Hill”) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. 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Contents Introduction ix Part 1: Beliefs from the Street 1 No One Can Beat the Market 3 Money Is Made from Single Positions and Kept with Diversity 5 Don’t Average Down on a Loser 9 Cut Your Losses and Let Your Profits Run 11 If Investments Are Keeping You Awake at Night, Sell Down to the Sleeping Point 13 Beware the Triple Witching Day 15 If You Wouldn’t Buy a Stock at That Price, Sell It 17 Bull Markets Climb a Wall of Worry 19 Bear Markets Slide Down a Slope of Hope 21 You Can Time the Market 23 When Intel Sneezes, the Market Catches a Cold 27 The Trend Is Your Friend 29 The Stock Market Rises as the Bond Market Falls 31 Follow the Rule of 20 33 A Rising Tide Raises All Ships 35 A Random Walk on Wall Street 37 The Market Is Efficient 39 Don’t Invest on the Advice of a Poor Man 41 v vi CONTENTS The Perfect Portfolio Never Needs a Trade 43 A Paper Loss Is Not a Loss 45 The P/E Ratio Works for Stocks but Not for the Market 47 No Tree Grows to Heaven 49 Never Check Stock Prices on Friday; It Could Spoil the Weekend 51 Never Buy on Margin 53 Mutual Funds Are Safer Than Individual Stocks 55 The Markets Abhor Uncertainty 59 Invest Money When You Have It 61 If a Trend Cannot Continue, It Will Not Continue 65 How the Market Reacts to News Is More Important Than the News 67 Don’t Overdiversify 69 The Dividend Law 71 You Can’t Go Broke Taking a Profit 73 Buy the Whole Market 75 Buy the Dips 77 Buy the Rumor, Sell the Fact 79 Buy and Hold 81 Bulls and Bears Make Money, but Pigs Get Slaughtered 83 Buy When There Is Blood on the Street 85 Bear Markets Last About a Year 87 Part 2: Stock Picking 89 Follow a Few Stocks Well 91 Being a Good Company Doesn’t Mean Being a Good Stock 93 Never Fall in Love with Horses or Stocks 95 As a Bull Market Begins to Peak, Sell the Stock That Has Gone Up the Most—It Will Drop the Fastest; Sell the Stock That Has Gone Up the Least—It Didn’t Go Up, So It Must Go Down 99 CONTENTS vii Never Try to Catch a Falling Knife 101 Share Buybacks Are a Sign of Shareholder­Friendly Management 103 Never Hold On to a Loser Just to Collect the Dividends 105 Buy the Dogs of the Dow 107 Buy the Stock That Splits 109 Buy on Weakness, Sell on Strength 111 Avoid All Penny Stocks 113 Don’t Short Small Stocks 115 Use a Stop­Loss When Shorting a Stock 117 Part 3: The Federal Reserve 119 Don’t Fight the Fed 121 Trust in the Greenspan Put 123 Two Tumbles and a Jump 125 Three Steps and a Stumble 127 Part 4: The Smart Money Talks 129 Actively Managed Funds Outperform in Down Markets 131 Follow the Fund Managers 133 The Longer That Institutional Investors Hold a Stock, the Less Volatile It Will Be 135 Pay Attention to an Analyst’s Price Targets 139 Follow the Smart Money 141 Economists Can Predict the Future 145 Part 5: It’s That Time of Year 147 The January Effect 149 Take Profits on the First Trading Days of the Month 151 As January Goes, So Goes the Year 153 viii CONTENTS The First Week of Trading Determines the Year 155 Sell in May and Go Away 157 Take Profits the Day Before St. Patty’s 159 Avoid the October Surprise 161 There’s Always a Santa Claus Rally 163 Part 6: People Believe This Stuff? 165 The Super Bowl Theory 167 The Markets Fall When the Mets Win the World Series 169 The Market Falls When a Horse Wins the Triple Crown 171 The Cocktail Shrimp Theory: Big Shrimp Means Big Returns 173 Short Skirts: Higher Hemlines Mean a Higher Market 175 Part 7: The Economy and Politics 177 The Market Will Collapse When the Baby Boomers Retire 179 The Stock Market Is a Leading Economic Indicator 181 Tax Cuts End Recessions 183 All Wars Feed Bulls 185 Part 8: A Few Misunderstandings 187 Your Investments Are Insured 189 CDs Are Safe 191 You Should Take Advantage of Tax­Free Accounts 193 Sophisticated Investors Are in Hedge Funds 197 The SEC Keeps Average Investors Out of Risky Investments 199 The Higher the Risk, the Higher the Return 203 Index 205 Introduction LL OF THE UNCERTAINTY ABOUT THE FUTURE of social security and Athe shift from pension plans to stock market fueled 401(k) accounts has left Americans with the burden of knowing and playing the stock market, though many have little interest in the world of Wall Street. That forced entry into a confusing industry beset with institutional pitfalls and outright dishonesty leads to fear and to the desire for easy ans wers. But answers to the most important questions about when to enter the market and when to sell a favorite stock are always subjective. These myths attempt to remove subjectivity from the process, but they largely fail to do so. They are important to know, however, because every investor who deals with a broker or financial adviser, or who consumes the financial press in its myriad forms, will be confronted with truisms designed to make the com­ plex look easy and the risky look like a sure thing. The very existence of these myths sheds light on the psycholo gy of the people who repeat them. Industry folk enjo y quoting Warren Buffett, saying that the ideal holding period for a stock is “forever.” That’s nice.
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