Yesterday he came to my cube and let me know that he had bought Monster Beverage Corp (MNST), and they had a situation.
|5 day chart Apr. 26, 2012|
He left, and came back after a few minutes letting me know he sold the shares and made 17%. Later that same day Coke announced that it would not be buying the company. The stock closed around previous levels.
Here is why you sell the rumor. If the rumor is true, the price/value is probably already reflected in the stock price. Therefore no further gains can be obtained. In fact, if Coke would put a tender offer...usually the share price will stay the same until the deal is finalized. Some arbitrage can take place during this time as well, but it is usually a small window. This means that your stock is tied up with no further gains to be realized. If you sell, then you have the opportunity to use your money on something more productive.
Another reason is if the rumor isn't true, you lost out on a huge opportunity. This is the difference between realized return and expected return...kinda like the bird in the hand theory. Sometimes these events are nothing more than luck. So when lady luck smiles on you, take it! Never feel bad about not making more money if you sold early especially on a rumor. Because the situation is much worse if you are wrong. 17% in one day can be a lot of money. If you invested $10,000...then that is $1,700. If I could make that every day, life would be a tad different for me.
Another example is when Microsoft Corp (MSFT) was going to purchase Yahoo! Inc. (YHOO) This is when Yahoo! was around $30 per share. Now it is selling for 15-16 range.
Hope and dreams are good for people who want to take action. Otherwise your hope that the rumor comes true, or dreaming about the possibilities ends up being nothing but smoke and mirrors.
Disclosure: Military Millionaire current does not own any shares mentioned in this article.