Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
For years, the prevailing academic view was that markets were efficient -- driven, pundits would say, by the invisible hand of rational behavior. But there was only one problem: This theory wasn't true. Although markets do gravitate toward the rational -- a blessing, actually -- current research shows that investors can be anything but in their day-to-day actions. This may cause volatility in the shares we hold, but wise Fools have learned to embrace these strange little movements as buying opportunities.
With all the news, rumors, and noise buzzing inside investors' heads, it's hard to decree exactly which price movements are rational and which aren't, but with that said, let's take a look at a few stock swings that don't appear to reflect the most level-headed thinking.
While this stock has made a number of irrational moves lately, when the markets opened today shares of J.C. Penney (NYSE: JCP ) quickly rose higher by more than 5.1% due to earlier heavy volume. Investors buying shares early in the morning were likely doing so based on comments made by CEO Myron Ullman yesterday. Ullman again told investors that the retailer still expects to report positive same-store sales figures for the third quarter, which will be reported on November 19. Why was this an irrational move? Well, on Monday when the news hit, shares of J.C. Penney jumped as much as 10% and closed the day up 8.8%. The excitement rolled into this morning, but didn't have the stamina to last even the whole day. Shares closed down 0.14%. Furthermore, unless you just started investing a few days ago, we have all heard management say, "We are going to have higher sales this quarter. We are going to turn a profit. We are this, we are that." And more than once, it has been wrong. Talk is cheap and, until I see the numbers, I don't put a whole lot of faith in what's going on.
Similar to J.C. Penney was Sohu.com (NASDAQ: SOHU ) , which lost 0.32% after being down as much as 2.33% and trading up as much as 1.07%. Today's fluctuation came after shares fell 16.34% yesterday when the company reported mixed quarterly results and weaker-than-expected guidance. Also, management stated that it's seeing declines in advertising sales, which may pose a problem in both the short- and long-term growth of the business.
While it's completely understandable why shares of Sohu.com tanked yesterday, early-morning buyers could have purchased at a better price later in the day and sellers could have sold at a better price than some did during the day. The lesson with both Sohu.com and J.C. Penney is that you shouldn't get too excited and rush to buy or sell right after news hits the wires. Wait till the hysteria dies down before pulling the trigger, because while it may not seem like it, it always dies down and you will likely get a better entry or exit point at a later time. Or, at the very least, you will have more time to digest the information and consider options other than what your gut was telling you.
A deeper Foolish perspective
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.