Tuesday, February 01, 2005

Psychology 101: Market Efficiency

BlogginWallStreet recently ruminated on the efficiencies of the stock market, reiterating to us that if a stock's been rising becuase of a buyout rumor--best hold off on adding a boatload of it to your portfolio. The bottom line is that by the time you read about it in a magazine or see it on CNBC, the rumor's already been factored into the price of the stock.
...there has been a renewed interest in M&A and other corporate actions. Over the past couple of years companies have been booking profits derived from cost reductions. And companies that have been hesitant to make investments in their own businesses have been stockpiling cash. Now they are looking for other ways to boost earnings. Consolidation is one way. Companies are spinning off or selling off divergent business arms, and purchasing competitors. With all this activity there’s a lot of speculation about who might next be acquired...Savvy investors would be all the savvier by staying out of such speculation. It’s gambling if you don’t have inside information, and illegal if you do. Any stock already run up on rumors is going to come crashing down when they turn out not to be true. There is nothing further from the truth than the old adage “Buy the rumor, sell the news.”
Henceforth, only surprise buyouts shoot stocks up significantly higher. Otherwise, you're just looking at a climax run, a cadre of investors who've come to realize that the baby they've pushed for so long has run out of gas. Demand withers, they sell, and those who thought of buying now opt to sit it out on the sidelines.

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