AJ Bell (LON:AJB) turns in excellent results and the share price falls 10%. It’s struggling to revive this morning. All of which goes to show the sometimes truth of the old stock market adage, buy the rumour, sell the fact.
Sadly the adage isn’t a true and one hundred percent guide to reality but it’s useful often enough.
AJ Bell is a stockbroker and fund manager. This past year has been good to the sector. We out here have all been earning – all put together that is – about the same amount as we normally do, we’ve also not been able to spend on many things. Going out, travel, these sorts of things that make up a significant part of normal spending have been, let us say, difficult. The savings ratio – how much of total income we save – jumped from 5% to 23% and is still greatly elevated at 11%. That’s all got to go somewhere and the folks – like AJ Bell – who gatekeep our access to the markets have been doing well.
AJ Bell’s profits are up over 13%, revenues – that’s the cut of the investment flow AJ Bell collects – up 15% and there’s £40 million being returned to shareholders. That should be just great for the stock, right?
Which is where we get to that little truth that markets are forward looking. For all of this was obvious enough over the past 6 months, the past year. We’ve the results from other companies in the same market to look at, we can read the stories about the zero commission brokers. We can observe our own behaviour of course. We know stockbroking and fund management have been good businesses.
So, of course, the stock price already incorporated much of this news. For we all already knew it so we’d already been basing our positions on what we already knew. Formally this is known as the “efficient markets hypothesis”, that things that are known are already in market prices.
When the actual news of the profits come out that it’s been a good year is already accounted for. The only question left is was it stonking or just very good? When the answer is just very good then the price falls. Or, as that adage has it, buy the rumour, sell the fact.
As to the future there’s a certain volatility to look forward to. The determinant being largely the behaviour of us traders out there. Is the savings ratio going to stay at that high level, meaning more traffic into the system? Are we traders going to use AJ Bell or some other broker and fund manager? How much of a bite of the business are the zero commission businesses going to take? How much their own launch of a zero commission brokerage will reduce the more traditional trade flow even if increasing the total?
The price will move on what we think will happen to all of these things. By the time we find out then the price might well move against good results. As happened here. It’s fun that it’s a brokerage like AJ Bell which is teaching us this adage about the markets themselves.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.