Why context is important

Any piece of information on its own has little significance. If I tell you that in a football match Brazil scored a goal. Would one celebrate upon seeing this? Well, most likely, yes. But let me add some details, or context to this. This goal was scored at 90th minute. The date was 8th July 2014. Football fans already know what I am talking about. Brazil had conceded 7 goals prior to this in what was supposed to be their home turf. It was the semi-final of the FIFA world cup 2014.

What seemed like a simple piece of information was actually the worst nightmare for Brazilians in decades.

Now lets look at another incident that happened a few days ago. A drug manufacturer released a medicine to treat mild to moderate cases of COVID-19. A friend of mine asked me if it was a good idea to invest in that stock since such news often causes the stocks to rally. I asked him to wait out the initial euphoria. Why did I say that?

The piece of news on its own was good. Once again, lets try to add context to this information. This was not the first time a pharma company had claimed to have a drug for COVID-19. In most cases the drug was found to be either not as effective, or working on only select cases, or in a rare case or two completely useless or even harmful. A normal cycle for developing a drug on an average takes somewhere around a decade. All these drugs had gone from conception to release in under a year.

Now before we go any further, let me admit that I am no expert in pharmaceuticals. But after adding the context, what the stock of that pharma company did makes more sense. The horizontal line separating red and the green was when the news of the drug came out. The stock rose about 20% within the day. (30% if you measure from the previous day’s close). Since then, it has given up all the gains. Market, it seems, added context to the information.

Now am I claiming that this stock has no potential for growth? No. I haven’t analyzed the stock from an investment perspective, and hence will not comment on it. But from a swing trading perspective, I did not want to enter into a trade where I had seen similar trades going south very quickly for retailers once the euphoria subsided. Because more often than not, retailers buy near the very top and then are stuck with a scrip which was overbought in the first place.

I am no expert in trading. I would go so far as to admit that while writing this article, I have no significant profit from trading to show for. But over the past two years that I have been watching markets, I have learnt a whole list of things to avoid while trading. And trading on news was one of them. It is not that simple.

There are no free lunches, as they say…

P.S. – Curious ones of you can check the charts of TATASTEEL today. The company reported a loss yesterday but the stock is up today.