A popular cliche among Wall St. old-timers and newbies alike is 'buy the rumor, sell the fact.' The staying power of the phrase highlights the fact that, even in our increasingly technological and well-connected world, 'perfect information' is, at times, a myth for the textbooks and an assumption for the scholars.
This past week provided a great example. Though always volatile, oil markets were especially testy after traders got wind of a possible armed conflict in the capital of oil-rich Nigeria. Although the country has flirted with controversy over election issues among others in recent years, oil wealth and economic growth generally lead to it being considered to be one of the more stable nations in the region. One must keep in mind as well that OPEC's membership isn't exactly a Who's Who of democratic and freedom-loving states. Therefore, the talk of instability in a typically stable Top-10 oil exporter left traders particularly shaky.
Fortunately, there was no armed conflict in Nigeria last week. Unfortunately, residents of neighboring Niger were not so lucky. It seems that traders got their African neighbors mixed up, as the conflict actually took place in the latter country, which has yet to produce oil. Therefore, last week's rise to around $80 per barrel lacked any reasonable fundamental basis. However, giving the cliche staying power and perhaps perpetuating its use among a new crop of traders, it was likely a profitable endeavor to buy on the Nigerian rumor last week. For obvious reasons, Benjamin Graham was unavailable for comment as we went to press, but I think it is safe to say that the more appropriate cliche in his case might be 'rolling in his grave.'