Keep calm and carry on?

"Buy on bad news, sell on good" might sound like a solid strategy for investors looking to beat a particular market - or at least trying to do so by strategically timing their entry and exit points. But many factors, geopolitical events and news, for example, would need to be followed closely to anticipate the next market dip.

Anticipating tomorrow’s market dip, however sounds a bit foolish. After all, every investor is able to see something but no investor has a hundred eyes to see everything, like Argos (the giant from Greek mythology, not the British furniture store, that is). Anticipating the market of tomorrow, however, would require investors to have hundreds of eyes connecting tons of relevant information.

Let's take the Brexit and its impact on the British stock market as a relatively simple example. Now, seven years later, a number of lessons can be drawn from it. The surprise Brexit referendum on June 23, 2016 triggered a sharp slump on the British stock market. The share prices of companies focused on the British market were affected most while more internationally focused ones were less affected (measured in pounds). So far, so clear: international companies are by definition less dependent on the domestic market, as they generate large parts of their profits and sales abroad.^[1]

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Higher profit margins for the FTSE 250 after the Brexit

_{Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 8/8/23}

Our Chart of the Week illustrates this by comparing the more international FTSE 100 with the more British FTSE 250.^[2] So, if one had acted entirely according to the initially posted thesis and taken the bad news of the upcoming Brexit as an opportunity to buy British stocks, one could have sold the shares by February 2020 with a significant profit. If we take a closer look at both indices, we can see that the more local FTSE 250 initially reacted more strongly to the Brexit. However, after both indices hit local lows on June 27, 2016, the FTSE 250 rebounded comparatively faster than the FTSE 100 with its more international focus. Our chart shows how well the FTSE 250 performed compared to local blue chips until the Covid pandemic hit global markets again in March 2020.^[3] So far, “Buy on bad news, sell on good” seemed like quite a good strategy – provided you also had the foresight to get out just in time, before the next bit of surprisingly bad news.

To sum up, it appears easy to rationalize a strategy while looking at historical data, but it may be much harder to actually follow this strategy as the market continues to develop negatively. Or even if the news tends to be, or remains, negative, as was constantly the case with the Brexit between 2016 and 2020 if you asked many economists and market commentators.^[4] After all, we know, not least from analyses of the past decades such as Amos Tversky and Daniel Kahneman’s Prospect Theory, how emotionally many people, not only as investors, act when fear is around.^[5]