For this month’s edition of TWWDT we decided to lighten things up and look at some of Wall Street’s more popular adages.
As someone who cut their teeth on the trading floor, I’ve heard these phrases countless times, with, “the trend is your friend,” “buy the rumor, sell the news,” and “never try to catch a falling knife” being particularly memorable. These sayings emerged from centuries of market experience, each carrying lessons learned through both triumph and catastrophe, and I believe they are still as true today as when they were first uttered.
The Wisdom of the Trading Floor
“The Trend is Your Friend”
This fundamental principle of technical analysis, often attributed to Martin Zweig[1] in the 1970s, emerged from the early days of chart analysis in the late 19th century. Charles Dow, the founder of The Wall Street Journal, was among the first to formally document trend analysis, leading to what we now know as Dow Theory.
Practical Application:
– Use multiple timeframes to confirm trends (daily, weekly, monthly charts)
– Look for trend confirmation through volume and momentum indicators
– Set stops based on trend support/resistance levels
– Scale into positions as trends strengthen
– Begin reducing exposure when momentum diverges from price
“Buy the Rumor, Sell the News”
This insight into market psychology dates to the early 1800s London markets, where traders would gather at coffee houses like Jonathan’s and Garraway’s to exchange information. The concept gained prominence during the Civil War era, when telegraph operators would often trade based on news before delivering it to their offices, an early form of insider trading that was perfectly legal at the time.
Practical Application:
Modern applications include:
– Earnings season strategies: Build positions 2-3 weeks before strong expected earnings
– Merger arbitrage: Take positions when deals are rumored, exit on formal announcements
– FDA approval trades: Enter during late-stage trials, exit on approval news
Key metrics to watch:
Unusual option activity
Sudden volume spikes
Institutional accumulation patterns
Insider trading patterns (legal)
“Never Try to Catch a Falling Knife[2]”
This saying gained prominence during the Panic of 1907, when traders who tried to buy falling stocks were said to get “cut” repeatedly as prices kept dropping. J.P. Morgan himself reportedly warned against trying to “grab bargains off the floor.”
Practical Modern Framework:
1. Wait for price stabilization:
– Look for decreased volatility
– Watch for volume patterns normalizing
– Monitor institutional buying signals
2. Identify bottom formation patterns:
– Double bottoms
– Inverse head and shoulders
– Bullish divergences in RSI or MACD
3. Use scaled entry:
– Start with 25% of intended position
– Add on confirmation of trend reversal
– Complete position once new uptrend established
The Psychology of Markets
“The Market Can Stay Irrational Longer Than You Can Stay Solvent”
While attributed to John Maynard Keynes, this wisdom emerged from the experiences of the 1920s, when many value investors went bankrupt shorting obviously overvalued stocks years before the 1929 crash.
Risk Management Framework:
1. Position Sizing:
– Never risk more than 2% of portfolio on any trade
– Size positions inversely to volatility
– Account for correlation among positions
2. Time Management:
– Set maximum holding periods for contrarian positions
– Use options to limit downside risk
– Implement rolling stop losses
3. Capital Preservation:
– Maintain minimum 25% cash position in volatile markets
– Diversify across uncorrelated strategies
– Use hedge positions rather than outright shorts
“Bull Markets Climb a Wall of Worry and Bear Markets Slide Down a River of Hope”
This observation emerged from studying market behavior during the Great Depression, when every rally brought hope of recovery, only to lead to further declines.
Practical Indicators:
1. Bull Market Warning Signs:
– Excessive retail participation
– Record margin debt levels
– Widespread “new era” thinking
– Disconnection from fundamentals
– Low cash positions among fund managers
2. Bear Market Warning Signs:
– “Dead cat” bounces with declining volume
– Relief rallies meeting heavy resistance
– Deteriorating market breadth
– Lower lows and lower highs
– Failed technical breakouts
“Be fearful when others are greedy and greedy when others are fearful.[3]”
This quote is attributed to Warren Buffett and is a markets-specific update to Baron Rothschild’s famous advice: “When there’s blood in the streets, buy property[4].”
The premise behind it is:
● Markets tend to drive prices to extremes in both directions
● Peak optimism often coincides with overvaluation
● Peak pessimism often presents the best buying opportunities
● Human psychology leads most people to do the opposite – buying high out of FOMO and selling low out of panic
● The hardest time to buy is often the best time to buy
Seasonal and Market Dynamics
“Sell in May and Go Away[5]”
This pattern dates to the 1800s when London merchants would leave the city during summer months, leading to reduced trading volume and liquidity. The phrase was first documented in the Financial Times in 1935.
Modern Application Framework:
1. Sector Rotation Strategy:
May-October: Shift to defensive sectors
– Consumer staples
– Utilities
– Healthcare
November-April: Rotate to growth sectors
– Technology
– Consumer discretionary
– Industrials
2. Risk Management:
– Increase option hedge positions
– Raise stop-loss levels
– Reduce leverage
– Increase cash positions
“Markets Take the Stairs Up and the Elevator Down”
This observation became particularly relevant after the 1987 crash, when portfolio insurance and program trading created a cascade of selling that dropped markets 22% in a single day, and correlates with Prospect Theory[6], which premises that losses tend to trigger stronger emotional responses and more urgent action.
Modern Risk Management Approach:
1. Uptrend Management:
– Trail stops wider to allow for natural volatility
– Scale into positions gradually
– Lock in partial profits at technical resistance
2. Downside Protection:
– Maintain puts for tail risk protection
– Use volatility instruments as portfolio hedge
– Set closer stops during high-volatility periods
– Monitor correlation breaks among assets
“Bulls Make Money, Bears Make Money‚ Pigs Get Slaughtered[7]”
While this quote is frequently attributed to Jesse Livermore, its most likely a Wall Street adage that got passed down through time as a warning not to be too greedy.
Disciplined Trading Framework:
1. Profit-Taking Rules:
– Scale out of winners at predetermined levels
– Take partial profits after significant runs
– Re-evaluate position size after doubles
2. Risk Controls:
– Set maximum position sizes
– Implement strict stop-loss rules
– Define maximum loss per trade and per day
– Regular portfolio rebalancing
These timeless market adages have endured because they capture fundamental truths about market behavior and human psychology. While markets have evolved dramatically since many of these sayings emerged, their core wisdom remains relevant. Modern traders and investors can benefit from combining these time-tested principles with contemporary risk management techniques and market analysis tools.
The key is understanding that these aren’t just clever sayings, they’re distilled wisdom from centuries of market experience, each representing lessons learned through countless cycles of boom and bust. By studying their historical context and applying them thoughtfully to modern markets, we can better navigate the ever-changing landscape of financial markets.
[1] https://en.wikipedia.org/wiki/Martin_Zweig
[5] https://www.cityam.com/should-investors-sell-in-may-and-go-away/