Baked In The Cake

As a phrase, baked in the cake is used to indicate that some important or influential information, such as unverified news reports or earnings projections, has already been taken into account and included in a stock’s market price, so that an investor just learning of the news is unlikely to be at an advantage by acting on it.

Baked in the cake can also be used to refer to a complex situation with many intertwining factors that cannot be separated from one another, or a current or impending situation that cannot be solved or avoided. For example, one might say that a looming, unavoidable recession is baked in the cake; one might also explain that a specific long-term unemployment rate is baked in the cake.

Investors who try to profit from breaking news must answer a difficult question: How many other investors have already acted on the news? This fundamental issue is related to insider trading and asymmetric information. In order to profit from breaking news, an investor has to be one of the first to hear of it. Once a critical number of investors have traded on an earnings estimate, for example, the news will be considered baked in the cake; that is, it will have already influenced the stock’s market price, meaning that investors who hope to profit from taking action on this information have instead obtained it too late.

Investors should be careful when it comes to what news they trade on, and where that news is coming from. The advent of the Internet has increased the availability of information, but the source and veracity of the information found on the Internet is difficult to ascertain. For example, if an investor is told material, non-public information by an employee of a company, trading that company’s shares may lead to an investigation by the SEC, as acting on non-public information about a company in order to make a profit from investing in that company may be illegal insider trading.

In addition to concerns about the source of information found online, investors need to consider that information gleaned from online sources may already be baked in the cake. Many online sources may not be releasing influential information early enough for investors to act on that information to their benefit.