Re: [EMLX] Personal Commentary on Reacting to Hoaxes
In the next few weeks just about everyone in the financial press will be offering us advice on how to protect ourselves from hoaxes like yesterday's fake Emulex PR. They'll tell us to not to believe everything we read, not to act impulsively, and to take time to do our own due diligence. Good advice before you invest in a company, but if you're the type that checks the price of your stocks every day like millions do, toss it in the garbage. You snooze you lose in today's market with today's technology.
As we all know, the true price of a stock is whatever someone wants to pay for it. Perception is reality. Manipulating perception is what the whole game we call the market is all about.
There are many ways to manipulate perception. An investor can influence the price of a stock by what they post on message boards like Silicon Investor, Raging Bull, and Yahoo. Companies can corral new investors by hiring a tout service to spam them via e-mail. And companies themselves can issue any number of carefully worded press releases to drum up interest. Manipulation happens at all levels, from an upgrade by a brokerage house, to a mention on CNBC, to the way a company presents its financials, to a chat board "guru" urging his minions to buy this week's can't-miss pick.
Good traders know when and how their investment is being manipulated and act accordingly. The disseminated information may be true, or if may be total fabrication. Just as we're taught to dial 911 when we smell smoke before we go see if there's a fire, traders need to be able to react to "news" at face value before doing (additional) thorough due diligence. More specifically, traders need to immediately ascertain how their fellow traders will react (and re-react) to the same "news" item.
The cynical might argue that yesterday's Emulex press release was just another, albeit severe, form of manipulation. While I'm tempted to agree, at this point in time I'd call it an exception to the rule. Sure PRs are propaganda and should inherently not be taken at face value, but outright hoaxes are (thankfully so far) still few and far between. While savvy traders who reacted at face value were able to sell on the news, determine the PR was a hoax, and buy back at bargain-basement levels, those that slept through the whole incident only lost momentarily on paper since the price shot back up once trading was resumed.
The bottom line is that what happens every day in the market is much more insidious than what happened yesterday with Emulex. It is far far more likely one will lose their money to garden variety manipulation than to a Emulex-like hoax. Of course everyone should still do their own thorough due diligence, but the key to success in today's market is not just recognizing manipulation, but recognizing how others will interpret and react to manipulation. The Internet and 24/7 financial stations like CNBC have institutionalized manipulation, so expect things to get much worse before, if ever, they get better.
Happy trading! :)
- Jeff |
