On July 31, 2008, investors were reminded of the fact that investing is a relative game, not governed by absolute laws. Exxon Mobil reported the largest quarterly profit in U.S. history, and its stock fell nearly 5%. (The S&P 500 declined 1.3% on the same day)
The chart below is a great example of how markets act like a discounting machine…
..From 2005 to its peak in 2007, as Exxon became the greatest cash generating company of all-time, its stock rose 85%. But the stock peaked a year before its final record quarter, and rolled over well before its earnings did.
Michael Mauboussin said “I can say categorically that the single greatest error I have observed among investment professionals is the failure to distinguish between knowledge of a company’s fundamentals and the expectations implied by a stock price.”
This is what makes investing so exciting and also endlessly frustrating. Even if you were given the news ahead of time, it doesn’t necessarily give you any insight into how the market will interpret it. Sometimes they buy the rumor and sell the news. Sometimes they buy the rumor and the news but then sell shortly after. The market doesn’t respond to good or bad, it responds to better or worse, but usually not in the way you expect.