You may have heard the term ‘buy the rumor, sell the news’ before. Here’s what that means.

The saying “buy the rumor, sell the news” comes from the phenomenon of stocks trading up into “big” announcements, and then (often) selling off shortly thereafter.

Let’s take an example:

1. XYZ Has a “Big” Product Announcement. XYZ has been touting the release of a new product that will dramatically change the cell phone industry.

Exact details of the product aren’t known, but the XYZ hype machine is operating at an extremely high level. The blogosphere is consumed with what this product might be, and investors pile into the stock, sure that the new product will be a big hit.

The stock trends higher for a few weeks, right up until the details of the new product are revealed.

Now, one of three things can happen here, from most likely to least likely:

1. The product is announced, and the reception is great. However, the stock still sells off. Why? Many investors were planning on hitting the exits as soon as details of the product were released, because they know that it’s smart to “buy the rumor, sell the news”. In addition, it is nearly impossible for this product announcement to live up to the hype, so the stock sells off.

2. The product announcement is very underwhelming. This is the worst case scenario for a company. Short-term traders bail, analysts are nonplussed and perhaps some long-term investors sell as well. Not a good thing.

3. The product unveiling is a MASSIVE hit, and investors pile into the stock because the product is so revolutionary, sending the stock even higher. This is a pretty rare occurrence.

That’s the basic gist of “buy the rumor, sell the news”.



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