Back to basics

Last week, I fell for one of the oldest tricks in the business book. Well, to be more accurate, it wasn't exactly a trick, but certainly a basic mistake that I really shouldn't be making — even in my sleep.

The case in point was a news story about the investment bank Goldman Sachs that I saw on the Financial Times website on 18 January in the late afternoon.

The headline of the story read: "Goldman earnings decline 58%". And this was the first paragraph: "Goldman Sachs has revealed a series of dramatic cost cuts and a 58 per cent drop in fourth-quarter earnings after grappling with tumultous trading conditions in the latter part of the year."

I didn't read any more. Goldman Sachs was clearly in a bad way, with a huge fall in fourth-quarter earnings (another word for company profits). My instant reaction was that this could be the start of another investment banking meltdown in the US. 

That was my first mistake. If I had read the second paragraph, I would have learned that "the results follow disappointing earnings at rival JPMorgan and Citigroup...". All I can say in my defence was that I hadn't been following the investment banking business that closely recently.

But the really big mistake, the one I shouldn't make even in my sleep, came that evening when I was, well, about to fall asleep. The business news was on the radio and, once again, it was the Goldman story. The reporter wrapped up by saying, "Goldman's shares ended the day...". 

Before she had finished this sentence, my brain had anticipated her next word, which, after that dreadful fourth-quarter performance, was clearly going to be "down". 

Except it wasn't. Instead, what she said was, "Goldman's shares ended the day up more than six per cent". Ouch! I felt as though I'd simultaneously had my pocket picked and a watch stolen from my wrist.

The explanation for this combination of dreadful performance and rising share price was simple. The markets had expected the Goldman results to be even worse than they were. As the Financial Times had reported at the end of the original story, Goldman's profits equated to "$1.84 a share, outstripping consensus expectations of $1.23 a share".

In other words, the markets had "priced in" much worse news in advance. And when the reality was less awful than expected, the share price rose again. It's that basic.