News & Market
Investors in the financial market always pay great attention to news as it can influence market prices. Investors can make good fortunes if they can correctly understand how a piece of news can influence the market. If they interpret a piece of news wrongly, they may suffer heavy losses. This time, let us look at the relationship between news and market.
Investors should understand the majority's response to news
Market changes are formed by the collective flavors of market participants. So, when we try to understand a piece of news, we should not simply start from how "I" think, more importantly, we should guess how the majority will respond to the news. It is no use how correct your viewpoint is. If the majority's view is different from yours, the market will only follow the thoughts of the majority.
When judging how the market will react to a certain kind of consumption, I will not shut the door and keep myself isolated. Instead, I will look for some typical people in the public and try to test their responses before making a judgment.
My almost 30 years of experience in the investment market shows that the general public is foolish. It is not how clever you are but how well you understand the foolishness of the public that brings you to a correct judgment.
For example, during the IT frenzy, you might have guessed that it was a bubble but you didn't know how foolish the public was. So, you would never have imagined that IT stocks could jump that high and you missed the chance to make big money. Perhaps you will comfort yourself by saying that you have avoided losses as the bubble burst. But this is merely moral victory because it is not common to have such big volatility in the investment market. It is a pity that it does not happen once every decade.
News are useful only when the market has not reacted to it
The value of a piece of news does not lie on how significant the impact is, but on whether you can master it before it functions.
When a stock surges, the general shareholders will try to get news and understand why this stock rallied so fast. What they hear, in fact, is second-hand news, or even third or fourth hand. Share prices have long reflected that piece of news. It is too late to chase the stock by this time.
Therefore, only when you know a piece of news unknown to the majority in the market, and you can guess the market reaction to it, will it become a money-making opportunity.
Relying on insider news to make money may violate the law but sometimes you do not need insider news. Instead, you can use your own analysis and prediction to tell whether certain things will definitely take place.
For example, when others were not sure if the U.S. will invade Iraq, you can be certain that it was going to happen. And you can correctly tell how the financial market would react. In this way, you can make some money.
In addition, there are news that everybody knows but its implicit meanings cannot be understood by the majority at the moment. If you are alert, you can make a step ahead of others.
For example, when "CEPA" and "Individual visits" were first announced, nobody could've guess how significant the underlying meanings were. Therefore, the market had not reacted fully at once and there are abundant opportunities to enter the market. If you can realize that at that time, it means that the Central Government is determined to support Hong Kong and there will be many chances to earn money.
At present, not only Chinese investors, but also overseas investors are increasingly concerned that China will have this ability and they want to take a ride on the train. In this way, the uptrend this time will not end that quickly and 12,000 points will definitely not be the peak of the benchmark Hang Seng Index. Therefore, we should take hold of every correction to add our holdings instead of giving up the chances of making money.
Cold shoulder bad news; market to turn around
Sometimes, we can conclude the market situation by looking at the market responses towards good and bad news. For example, the property market had fallen only by a very limited extent during SARS and the July 1st demonstration. The fall was not as rapid and steep as seen in the 1997 Asian financial crisis. That reflected that property prices had reached the bottom and there was little room for further downside. When market reaction to bad news was cool like this, we could be optimistic about the market outlook.
By the same token, if the price of a stock is little changed even after its company has announced a consecutive series of news, it means the share price at that time has reflected all the positive factors. Perhaps some early birds had taken the advantage to take profit at that time.
Some said that investors should unload stocks in times of good news and buy when bad news emerge. This can be true to some extent but the most important thing is we have to see clearly whether it is a bear or bull market. If we are at the start of a bull market, there is no reason to take profit even when there is good news. On the opposite, if we are near the end of a bull market, certainly we should not buy when there is bad news.
I think at present, we are near the end of a bear market and at a start of a bull one. If you agree with my observation, it should not be hard to tell whether it is time to buy or sell.
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