10 Conventional Stock Market Adages Fact-Checked

Is the trend really my friend? Will investing back and forth really put you in the poorhouse? And what do sleeping pills have to do with trading stocks? Here we list ten of the most widespread stock market adages, explain what they mean, and look into how much truth they contain. Swiss investment experts give their evaluations of these conventional bits of stock market wisdom.

1. Buy at the sound of cannons and sell at the sound of violins

Meaning: Bad news can quickly send stock prices and even entire industry sectors tumbling (the sound of canons). Investors who believe in the soundness of the companies or indexes in question can take advantage of low prices caused by bad news to buy stocks at a huge discount. On the other hand, positive news about an asset can cause its price to soar (the sound of violins). If you want to sell stocks, this provides an opportunity to sell at a markup on the real value.

The facts: This proverb is particularly applicable to broad market indexes. The stock market crash which followed the onset of the coronavirus pandemic in the Spring of 2020 is a perfect example. Stock market rates already began to climb again in April of 2020 in spite of the bleak global outlook.

Hermann J. Stern, CEO of investment consulting firm Obermatt, told moneyland.ch that he uses this adage as a guidepost. However, he only buys if he believes that the bad news is exaggerated.

2. The trend is your friend

Meaning: It is easier to profit from a trend which you can already recognize than to predict future trends. The broadly-accepted interpretation of the adage is that you should let your profits run – meaning you should hold on to positions which are trending upwards. If rates have been going up for several weeks, there is a good chance that they will go up again tomorrow. If you believe the trend is long-term, you can better deal with short-term fluctuations in rates.

The facts: It is important to distinguish between megatrends which impact economic development over the long term (like demographics), and cyclical trends (like commodity price rallies). According to Matthias Geissbühler, Chief Investment Officer at Raiffeisen, megatrends can lead to long-term growth. Affected companies can profit from this. Short-term trends often pass quickly, and investing in these is often not profitable for retail investors and small investors.

Stern from Obermatt explains that the trend can be friend, but it can also be your enemy. Trends become your enemy when they change or become too popular. The danger with trusting in trends is that reverses in trends can sometimes be misinterpreted as simple fluctuations. When the tech bubble burst in 2000 and 2001, many investors thought the initial price dip was temporary, and bought more believing they were getting a discount.

3. Don’t try to catch a falling knife

Meaning: This adage is the flip side of “the trend is your friend.” The falling knife, in this metaphor, refers to a stock which is rapidly losing value. Theoretically it should be possible to profit by buying the stock exactly when the price stops falling and the trend reverses. But the risk of trying to time the market this way is very high. The stock’s price may well continue to fall. Because of this, it is generally not a good idea to buy in the middle of a steep price decline.

The facts: When the price of a security falls – immediately after negative reports, for example – this is often just the beginning of a longer-term price correction. If analysts downgrade the stock and the media continues to circulate negative reports, the stock could remain under pressure. Geissbühler advises investors to wait until the price stabilizes and only invest once the downward pressure has passed.

Long-term investors who have founded knowledge of a specific stock and its fundamentals can afford to catch a falling knife. By doing this, they can profit from panic sales and exaggerations. The term contrarian is often used to describe this type of investor.

4. Never invest in something you don’t understand

Meaning: If you invest in a company, you should understand what it is that the company does, how it expects to earn money, and the state of the industry sector as a whole. Investing in a business which you do not understand bears a higher risk. Investors generally have a lot of respect for this rule of thumb, because it was popularized by star investor Warren Buffet.

The facts: Geissbühler tells moneyland.ch that this adage should be written on the heart of each investor. It clearly lays out the difference between investment and speculation. Investors give a company the use of their capital, so it makes sense that they should not give their money to a company unless they know the company well and believe in its products and services.

The downside of following this rule of thumb is that you as an investor can miss out on chances to profit. Warren Buffet, for example, initially did not invest in tech stocks like Amazon and Google because he did not understand their business models.

5. Hin und her macht Taschen leer

Meaning: This German proverb means something to the effect of “back and forth will put you in the poorhouse.” Buying and selling regularly as opposed to buying and holding positions generates a lot of costs. When you frequently buy and sell, the chances of buying or selling at an inopportune time are high. While this does not always result in losing money, it can result in your losing out on potential profits (by selling early, for example).

The facts: Hermann J. Stern from Obermatt consider this adage to be a very good piece of advice. This advice is even more relevant in Switzerland, where brokerage fees are often higher than in the United States, for example. But other costs like currency exchange costs, the back- and front-end loads of funds, and bid-ask spreads also generate costs.

“You can drastically reduce your direct investment costs by trading with affordable stock brokers,” says moneyland.ch CEO Benjamin Manz. The moneyland.ch online trading comparison clearly shows which stock trading fees apply in Switzerland.

6. Buy the rumor, sell the fact

Meaning: When a company is about to make a major product launch or release an important report, investors often already react before the event takes place. They invest in the company before they know the exact details. Once the facts are evident, investors quickly lose interest. In many cases the price rally ends as soon as the new product is launched or the business report has been released – even when the news is positive.   

The facts: Expectations for a company’s or market’s future performance are already accounted for in stock prices early on. For example, stock indexes around the world had already fully recovered from the coronavirus selloff by the end of 2020, although the real economy had only just begun to recover from the crisis. The Swiss SMI stock index actually grew slightly over 2020. The high prices account for expected future growth. Because future developments have already been priced in, only new, the value of stocks will only grow significantly from current rates if new, positive developments occur.

This phenomenon is also relevant for Swiss investors, according to Geissbühler from Raiffeisen. A company just reporting a profit is often not enough to fulfill expectations. The company has to outperform expectations in order for its stock price to go up.

7. Don’t put all your eggs in one basket

Meaning: When you place many delicate items in one basket, you risk losing everything if you were to accidentally drop that one basket. The same applies to investments. If you focus your investments on a single asset, you run the risk of losing everything if that asset fails. Diversifying your investments across a broad portfolio of many different assets means you will only lose a small part of your capital if the investment fails. This means you are not dependent on the performance of just one company or market. The investment term for this practice is diversification.

The facts: Practically all analysts recommend diversification. The easiest way to diversify your investments is by using mutual funds or ETFs. Geissbühler recommends that narrow investment portfolios be left to absolute professionals who spend all day studying the corresponding market.

Stern from Obermatt has his own version of the old adage: “Wealth is created by specialization and preserved by diversification.” Spreading your investments helps to hedge against risks and preserve your wealth. Creating wealth, on the other hand, involves taking certain risks.

8. Buy shares, take sleeping pills

Meaning: The constant spikes and dips on the stock market can result in a lot of stress for investors. That is why writer and investor André Kostolany recommends that once you have bought stocks, you should not track price developments at all. This advice should help investors avoid selling their assets impulsively and missing out on profits. As long as the stock market continues trending upward, following this adage should increase your wealth over the long term.

The facts: According to Geissbühler, this adage is good advice for anyone who can and wants to invest over the long-term. Diversification is exceptionally important in this case. He recommends investing in ETFs, the MSCI World Index, or the SPI. These instruments let you take advantage of long-term, global economic growth without the risks associated with a single company.

The historical return comparison on moneyland.ch shows that long-term investment in Swiss stocks has paid off in past decades. But in around one-third of all years since 1926, inflation was higher than stock performance. That is why taking a long-term view is so important, says Benjamin Manz from moneyland.ch.

9. Never run after a bus or a stock

Meaning: If you have missed the opportunity to buy an asset at the right price, do not get so stuck on that asset that you go ahead with investing at the wrong price. The next investment opportunity will come along as surely as the next bus will come along. If you have enough patience, you can take advantage of the next opportunity. This adage is also credited to André Kostolany.

The facts: Price corrections are a steady feature of markets. But investors should not expect that an identical opportunity will always present itself. For example, the Apple stock saw frequent price fluctuations in recent years, but it never again dropped to where it was 15 years ago.

If you have missed an opportunity but do not want to wait around for the next one, you can consider going ahead with your investment by investing at regular intervals. When, for example, you divide up your capital and invest part of it every month, you avoid the risk of investing all your capital at the wrong point in time.

10. Sell in May and go away

Meaning: Investors should sell their stocks in May and reinvest their capital in Autumn. This proverb is based on the belief that the chances of stock prices going up are often higher in Winter than in Summer. Historical data confirms this. The full proverb: Sell in May and go away, but remember to come back in September.

The facts: Investment expert Stern considers this adage to be utter nonsense. The costs of selling and rebuying your stocks every year undermine whatever gains you may achieve. Additionally, although summer months may bring weaker performance, the performance may still be positive. For example, over the past ten years the SPI grew by roughly 7 percent, on average, between the months of October and April. But between May and September, the SPI still delivered average growth of around 2 percent. Investors who sold in May would have missed out on these gains.

Some larger funds and investors still do sell part of their assets ahead of summer under some circumstances – but only when the year’s gains up until May are exceptionally high. Geissbühler stresses that this only every applies to a portion of total investments.  

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