The Trader’s Reference Guide Part 3: Messaging
by Wayne A. Thorp
Each trading day, a growing number of investors begin their day with a cup of coffee and the Internet. Long before the U.S. markets open, they are checking to see what happened overnight on the overseas markets, previewing the whisper estimates for companies with earnings announcements scheduled for that day, and studying their stock charts. All this is done in the hopes of unearthing a nugget of information that will translate into a winning trade.
As the popularity of the World Wide Web has exploded over the past several years, so too has a new outlet where investors can converse among themselves and, perhaps, find that proverbial diamond in the rough. Message boards are on-line forums where people of similar interests can "converse" by electronically posting messages. Anyone viewing the board can read and respond to messages. Message boards should not be confused with on-line chat rooms, where the conversation occurs on a real-time basis between the participants in the chat room at a single point in time. Conversation on a message board takes place over a more extended period of time. After a message is posted, some time could elapse before anyone responds, if ever.
While computer bulletin board systems have existed since the early days of personal computers and on-line services, the Web provides a more centralized forum for communication. There are dozens of services where one can find discussions on individual stocks as well as broader topics such as technical analysis and day trading.
This installment of the Trader’s Reference Guide introduces you to the world of message boards, discussion groups, and newsgroups.
The "Word" on the Street
Message boards and newsgroups have become a favorite destination for investors, especially day traders–people looking to profit from small fluctuations in the price of a given security. While long-term stock movements are driven more by fundamental factors such as company financials, competitive position in the marketplace, economic conditions, and company management, short-term price trends can be influenced by emotion and market sentiment.
With a quick scan of a message board, you may be able to get a sense for what will be "driving" a certain stock for the day. Typical topics include discussions and analysis of company announcements, reports, fundamentals and technical factors along with warnings and projections of company and competitor announcements. Anything is fair play, including personal attacks, as investors with opposing opinions duke it out. Listening to other investors is a good way of gauging market sentiment.
Conclusion
On-line message boards and newsgroups can play an important role in your investment strategy–as long as you perform your own analysis of what is being written. It is important not to be swept up in the emotions of a posting, otherwise you may find your investment dollars swept away. In the end, it is your own due diligence and common sense that will protect your investments.
Reader Beware
Just as message boards and newsgroups have become a popular destination for investors, they have also become a spawning ground for spammers and scam artists. The ability to reach a large audience at relatively low costs is both an advantage and a burden for the Internet. Stock schemes that once required "bucket shops" with hundreds of operators trying to manipulate a penny stock can be duplicated with ease on-line.
Posters at a message board have a wide range of investment expertise and a variety of motives. Moreover, because message boards provide a degree of anonymity, it is difficult to know whether the poster is attempting to manipulate the price or is passing along an honest opinion.
Pumping and Slamming
A common concern voiced is that posters are trying to manipulate the price of a stock. This is particularly the case when it comes to the more thinly traded penny and OTC stocks, where information and financial statements are harder to come by. Since a majority of posters to an individual stock’s message boards probably have a stake in the company, they have a vested interest in the price movement of that stock. In the end, they would like others to buy the stock that they own. Likewise, they would prefer people to sell those stocks in which they have a short position. Two terms that have grown out of the message board medium are stock pumping and stock slamming.
Stock pumping involves hyping up a stock to create enough interest, and excitement, so that others will buy it–thus driving up the price. If the person succeeds, they profit as the price is bid upward. As is often the case, however, the pumper sells when he senses that the momentum is slowing or that potential investors realize the hype is just that. While the "hypester" has profited from the movement, it is invariably the investors sucked in by the hype who lose out as the stock price deflates once the momentum is lost.
Stock slamming is simply the opposite of pumping. An investor who has a short position in a stock–sells borrowed stock with the hope of covering or reversing the short position by buying stock at a later date at a lower price–will begin posting negative comments about the company. The slammer reports that earnings will come in well below expectations or that someone in upper management, such as the CEO, has resigned. These postings are aimed at creating a wave of selling. As the stock price falls, the slammer lines his or her pockets while others exit positions on bogus news.
The PairGain Affair
There have been some well-publicized cases of late involving the manipulation of stocks’ prices through fake postings on message boards. One involved PairGain Technologies (PAIR)–a Tustin, California, developer and seller of digital modems. On April 7, just after the markets opened, an innocuous message appeared on the Yahoo! Message boards with the heading "Buyout News!!! ECLIF is buying PAIR … ." Inside the message, posted by staceyITN from Knoxville, reference was made to an article on the Bloomberg Web site and a link was included. The linked news story indicated that ECI Telecom would purchase PairGain for an implied value of $1.35 billion, or roughly $19 per share.
Within minutes the Yahoo! board erupted with messages cheering the alleged deal. Within the same time frame, similar postings appeared on the other major message boards. Shortly thereafter, however, messages began appearing warning of an apparent hoax. As it turned out, the article was a fake–it was linked to a personal site and not part of Bloomberg.com. When the major newswires blew the whistle some four hours later, PAIR had risen from an opening price of $8.50 to $11.125–an increase of over 30%. When the dust cleared, the stock fell back to close the day at $9.375.
As it turned out, the fix was orchestrated by Gary Dale Hoke, an engineer employed by PairGain. He was arrested on April 15 and the SEC filed civil charges against him. On June 22, Mr. Hoke pleaded guilty to two counts of securities fraud and could face up to 20 years in prison and $2 million in fines.
Protect Yourself
Stories such as these reiterate the fact that it is imperative to do your homework before investing in a stock. One should never invest solely on what he or she reads on the Internet. Instead, due diligence must be performed to distinguish between fact and opinion.
Hearing all of the negative press over the last several months about on-line message boards may turn you off to using them. However, all it takes is a little common sense to protect yourself. The resources available on the Internet make verifying message board statements relatively easy. In the case of the bogus Web page that carried the PairGain merger story, all one had to do was to go directly to the Bloomberg site and search for the story. Immediately after the message was posted, other messages appeared stating that the news could not be found at the Bloomberg site.
While you shouldn’t invest on blind-faith, you also shouldn’t write off something out of fear. With a little work and care, you may find something worth investing in.
Where It All Began
On the Internet, newsgroups were the predecessor to today’s on-line message boards. The original Usenet system is a collection of E-mail messages and replies. It provides a free, public, and unregulated forum for discussion and interaction. The Usenet "hierarchy" consists mainly of the "Big 8" categories–computers (comp), recreation (rec), discussion (talk), society (soc), Usenet news (news), science (sci), miscellaneous (misc), and alternative (alt). Within each of these broad categories there are hundreds, if not thousands, of sub-categories that deal with more specific issues and topics. A newsgroup software program is required to download, read, and respond to Usenet messages, but the current E-mail programs supplied with browsers from Netscape and Microsoft support these functions.
A common assessment of newsgroups is that the content consists of 1% information, 98% noise, and 1% misinformation. The completely open system allows anyone to post messages, with no centralized ability to regulate, purge, or organize messages. Your Internet service provider maintains a server (computer) that stores and maintains the Usenet newsgroup messages that you can respond to. The ISP has full control of over which newsgroups are available for its users as well as the storage devoted to the messages. As new messages are added, older messages are purged from the system. Failure to frequently log-on resulted in missed messages, with no native ability to view the complete collection of messages, or thread, on a given topic. Services such as Deja.com sprouted to archive and organize newsgroup postings to allow for more intelligent searching and tracking.
Message Board Features
Message boards use Web browsers, not separate software, to interact with users. They are also divided into different areas. The more popular investment message boards boast discussion for every U.S. publicly traded company, although there is no guarantee this means active discussion.
Beyond offering broader, yet more focused, discussion topics than newsgroups, message boards tend to give the user more flexibility than standard newsgroup readers when it comes to locating and filtering out specific postings or posters. Many of the larger services allow you to locate postings containing keywords or made by specific people. Some posters on message boards have reached quasi-celebrity status because of their apparent skill at picking the winners and warning of the losers.
Lastly, message boards are generally more regulated than newsgroups. Boards such as those at the Motley Fool site have moderators that monitor postings to make sure messages are on the up-and-up. In addition, services such as the Raging Bull allow users to report those who violate the terms of service for Raging Bull posters by posting inappropriate messages.
Many services also offer varying degrees of investment-related news and information. Services such as Yahoo! and Motley Fool (Figure 1) offer comprehensive company and market research and information. Other services offer a mixture of information such as quotes, news, and company financials.
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