The title of this chapter is an old, respected truism in Wall Street. I ﬁrst heard it from an xperienced stock trader over 50 years ago when I was a neophyte Merrill Lynch account executive. It has been part of my professional strategy since I ﬁrst learned it, for it is one of the few signiﬁcant maxims in an industry where irrelevant slogans and sayings abound.
lt's too bad that not enough ﬁnancial operators practise this strategy. It could help traders and brokers in their speculative operations, especially in Asia, where so much of what passes for stock and commodity analysis depends largely on uninformed tips, rumours, stories and outright gossip. I would always put informed technical analysis over unconﬁrmed tips and stories.
I had an interesting experience recently, which exempliﬁes this point. The research director of a large Hong Kong investment ﬁrm showed me a price chart of some stock and asked for my opinion. ‘If you are a buyer or a seller of this stock,’ he asked me, ‘how far would you project the
stock to move?’ My reply was simple and direct. ‘I don't know.’
The gentleman was persistent and repeated the question. My reply was the same, but this time l answered in greater detail. ‘I don't think that anyone could give you a competent answer, merely on the basis of a single price chart with no further information or technical studies.’ Then I proceeded to suggest what additional information and studies I would want to examine before even attempting to analyse the chart.
‘That's extremely interesting,’ he replied. ‘Do you know that I've shown the same chart to at least six other brokers and analysts, and every one of them gave me a deﬁnite answer with speciﬁc buy and sell points and even price objectives. And all of them combined would orobablv have less years of trading experience than you have.‘ All I could say was, ‘That's not surprising; it’s what 1 would have expected.’
Jesse Livermore had a similar experience some 70 years ago. This is how he described it:
‘I was at a dinner party one evening and was seated next to a man who had heard that I was in Wall Street. Ar one point in the conversation, he asked if I could tell him how one could make some quick money in stocks. Without answering the question, I asked what business he was in, and he said that he was a surgeon. I then asked if he could tell me how one could make some quick money in surgery.’
We are continuously forced to come to grips with the unique relationship between market news (stories, gossip and tips) versus actual market action. How many times has a company announced some very bullish piece of news - an increase in the dividend, improved earnings or some acquisition — and the public goes charging in to buy the stock? Then, after a few days of relative strength, the stock is in full retreat with all the recent buyers, having bought on the bullish news, sitting with big losses. How could that be? Wasn't the news very bullish? Perhaps the answer lies in the fact that the stock had already been going up for some time, with the ‘insiders,’ who knew about the impending announcement, having been big buyers of the stock before any bullish news was known. Then, the announcement was made and the public rushed in to buy. Who do you think supplied the stock for this (uninformed) buying? None other than the insiders, who were accumulating stock in advance of the news.
Stock buyers of IBM experienced this ﬁrst hand, during the extended price decline from 1987 to 1993, when share prices declined from 175.00 to 40.00. At any number of times the stock was recommended by advisory services and brokerage ﬁrms, only to have it continue sliding relentlessly over a six-year period.
The sugar market, too, provides an excellent glimpse at the unique relationship between market news and market action. The way the news is released after every move should be studied by thoughtful investors. During an extended bear market in sugar, culminating around the 2.50 level in mid 1985, the decline was accompanied by
Figure 7.1 Long-term (monthly) stock chart of IBM, covering the period mid-1984 to mid—l994. Note the extended price decline from 175 to 40 over the six year period from l987 to 1993. '
every type of bearish news imaginable. But after the market had ﬁnally reversed and was moving north, the bearish news items were put back in the desk drawer and suddenly the bullish items were trotted out for dissemination. On 26 January 1987, following a protracted 200-point
sugar rally (equal to a move of US$2,24O pet contract on just a US$G}O margin),
The W/all Street journal noted the following:
‘Reports that the Soviet Union had been a large buyer of reﬁned sugar in the world market helped futures to extend their advance . . . . Analysts said Moscow had bought 500,000 to 700,000 metric tons of raw sugar . . . and one analyst said the Soviets may buy as much as a million tons more. Analysts said prices were also buoyed by a report that Brazil will push back contracts to export 750,000 to 1,S00,00 tons of raw sugar to 1988 or 1989 and by reports that Cuba is having problems harvesting and milling its cane sugar crop. In Brazil, diversion of sugar to alcohol production, stronger domestic consumption, and indications that drought may reduce the crop have created tight supplies, analysts said.’
The analysts seem to have ‘trotted out’ every bullish item they could think of after the market advanced. But you can be sure that, following the ﬁrst big price decline, the ‘news’ would suddenly become totally bearish. One must wonder who these 'learned' analysts are who are always able to explain why a market made a move after the fact, but never seem to know, in advance, what to do.
And so it goes. The salient points to keep ﬁrmly in mind are ﬁrstly that market prices ﬂuctuate and secondly that following every signiﬁt price move, analysts and commentators are to be heard offering perfectly plausible explanations for what just happened in the market. To many thoughtful observers, all this so-called news, ﬂoor gossip and rumour seems rather conveniently contrived by some of the professional and institutional operators in order to confuse and confound as many gullible traders as possible into taking untenable, anti-trend market positions.
There ought to be a way to avoid being caught in this recurring trap, and there is. The astute operator will ignore the plethora of rumours, pit gossip and what generally passes for market news, He will maintain his focus on the real technical factors underlying each market and on whatever disciplined strategy and risk control technique has worked best for him and for his particular style of investing or trading. He will not lose sight of the old Wall Street axiom:
‘Those That Know Don't Tell; Those That Tell Don't Know.’