Investment Advice

Buying Stocks Based on the News

Written by Adam Roy for Gaebler Ventures

Buying stocks based on the news can be an excellent investment strategy. We discuss making smart investment choices based on current events.

Expert traders often say that there are two ways to go about investing.

Buying Stocks Based on the News

The first, more common method is technical analysis. Investors who use this method research securities earnings reports, profit-to-cost ratios, and past performances of companies or funds in which they are considering investing. This is a process that traders refer to as "buying the market".

While buying the market is popular because of its straightforward methodology and relative ease, it has its limitations. Financial data is often a poor indicator of how an industry will perform in the future. However, for those investors who seek better returns or more reliable successes, there is a more fitting investment doctrine: "buying the news".

The theory behind buying the news is relatively simple. World events, such as military tensions, general economic growth, or population booms, affect different industries in specific and relatively predictable ways. Investors who buy the news analyze current events, attempt to predict the effects that those events will have on different industries, and then make investment decisions based on those predictions.

To illustrate the process of buying the news, consider the following example, drawn from real-world events. Months ago, Venezuelan president Hugo Chavez announced that he planned to nationalize foreign-owned energy companies operating in Venezuela. At this point, an investor who bought the news would have had several very rational options. If this particular investor maintained a Forex portfolio, it would have been a very good bet to maintain a short position on Venezuelan currency. It would also be very reasonable to buy funds investing in Brazil as well as other ethanol producers, as one could expect the US government to put greater emphasis on ethanol and other alternative fuels, if only to spite the Venezuelan government's newfound oil interests.

As we can see, the success of this analytical method depends largely on how skilled the investor is at extrapolation. Investors using this method must be able to predict the reaction that an event will provoke in government, the business community, and the market. While this may seem like a feat on the scale of telekinesis, the truth is much simpler.

Investors who are skilled at buying the news do not operate through intuition nor blind luck. On the contrary, they must consider entities' past reactions and current relationships, as well as maintaining an up-to-the-minute grasp on current events. Going back to our previous example, our investor likely would have known that the relationship between Venezuela and the United States was combative at best. In addition, the investor would probably be knowledgeable about recent successes in private equity, such as China's deregulation of major state-owned enterprises and Cerberus' recent purchase of Chrysler, that signaled investors' reluctance to continue sponsoring poorly-run public enterprises. By knowing facts such as these, the investor would have been able to synthesize the probable reaction of the global market and would have acted accordingly.

For all of its merits, however, buying the news is not a free ticket to financial success. As with any investing technique, it requires a good deal of practice before it can be reliably profitable. In addition, it carries the same risks as any other type of investment. Buying the news simply enables investors to make calculated gambles instead of betting on the blind. In the end, though, a gamble is still a gamble, and the possibility of failure still remains.

While it may not be magic, buying the news enables skilled investors to make more reliable and thought-out choices when deciding where to grow their money. If used correctly, it is a powerful technique that can complement every entrepreneur's financial arsenal.

Adam Roy is an accomplished writer specializing in business writing and topics of interest to entrepreneurs and small business owners. His own fast-growing small business, Roy Writing, is based in Northbrook, Illinois.

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