Saturday, January 13, 2007

When to buy...

James Bartholomew makes a good point today.

If everybody is saying a stock is a dog, it's probably a good time to buy. Similarly, if everybody is saying how great a stock is, it's probably time to sell (or short, if you're feeling sophisticated).

The argument is relatively simple: if everybody thinks something is rotten, the chances are the bad news is already captured in the price. Similarly, if everybody thinks something is good, the chances are that good news is also in the price (remember that the counterparty to any transaction probably has access to similar information as you... they're reading all the same articles saying how good it is!)

I know "anecdote" does not equal "evidence" but I have been very heartened by my success with this approach to date: I bought shares in William Morrison about eighteen months ago when there was bad news appearing in the press every day of the week. I'm currently over 50% up.

James also runs an interesting blog here. (Although it appears to be down right now)

No comments: