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April 2, 2011

Sell on the Rumor

“The surest way to profit from a takeover speculation in the stock market is to bet it’s wrong according to an article in Bloomberg Businessweek article in the January 17 – January 23, 2011 edition.
They examined 1,875 rumors about pending buyouts of 717 companies from 2005 to 2010.  Only 104 of the companies were acquired.  Initially the stock of the takeover companies jumped.  They generally declined in the following weeks.  In the day, week and month following the rumor the stocks fell while the Standard & Poor’s 500 stock index rose. 
One person they interviewed speculated that the rumors probably were started by someone interested in selling the stock.  Another person stated “You might be be able to see a unicorn before you see a market manipulation case established based on rumors.”
Bloomberg found that companies mentioned in takeover rumors were no more likely to be acquired than any other company.  The conclusion was that these rumors should be ignored.
That is probably true of  much of what you read and hear.  Most of what we see and hear is static.  If you follow the ups and downs of the market, you do not know if you should follow the buyers or the sellers.  Professional traders are continuously reacting to movements in the market.  Even if they were correct, the market would most likely have responded before you heard about it.  
Long term investing requires picking companies with strong management or funds with strong management that has the ability to respond to the the unknown future events.    

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