Buy The Rumor; Sell The Fact
Traders use many words, phrases and clichés that are unique to the industry. Many of these like bullish, bearish, short or long are well known and therefore easily understood. Some of them however, are commonly heard but not understood. One that gets used a lot is “buy the rumors, sell the fact.” What does it mean and is it at all useful?
Let’s break the cliché down. First we have to take the word “buy” in the phrase and understand it doesn’t mean buy or go long in the literal sense. What it really means is to place a trade or take a position in the commodity, index, FX pair or security that is affected by whatever rumor is floating around. Based on that, even though the phrase is “buy the rumor…” The position taken can be a long or a short.
Next, one has to realize the word “rumor” may not be a rumor at all. A rumor, as referred to by this old trading adage can be a fact, such as an economic release that gets leaked or released to subscribers early like the University of Michigan’s Consumer Sentiment Index, which for years was released to paying subscribers 15 minutes before the general market. It can be speculation, such as a whisper number for a stock’s earnings (an estimate that makes its way around the market) or a jobs number, which then can be confirmed or proven wrong by the actual release. It can also be an actual rumor, such as a potential CEO scandal, or a particularly well-capitalized, well known market participant taking a position that others want to take as well. In the FX markets, “George Soros is buying” was an oft-heard rumor that would move markets and turn out to be either false or impossible to confirm. (If that’s a name you’ve never heard, Google it and the effect of these rumors will make more sense).
Finally, “sell the fact” is the part that matters most. Whatever position was taken upon hearing the rumor, is generally exited when the truth is revealed, whether it confirms the initial rumor, or contradicts it. So why does this happen and what does it matter?
Traders are often looking for any edge they can get, so if a rumor, in any of the forms listed above circulates, they will try to get in on the move early. This dampens the amount of trade that happens once the actual news is released, and those that got in on the right side will exit. Even if the rumor turns out to be spurious, the subsequent move in the other direction forces the early entrants to cut their losses, hence “buy the rumor, sell the fact”.
It’s difficult to make this into a cohesive strategy, so stick to price action, but understanding market clichés is never a bad thing.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results