Some of you may be interested in reading this Money Daily article:
Tuesday, February 25, 1997
Seven great Internet investing myths
Sure, the 'Net's a treasure trove of information for
investors, but watch out: a lot of it is fool's gold
by Michael Brush
There's no argument: convenient access to stock quotes,
market news, complex fundamental data on companies and the
economy -- not to mention chat rooms for freewheeling
discussions on stock tips -- make the Internet one of the
best things that has ever happened to individual investors.
At the same time, though, investment discussions on the 'Net
are often rife with misinformation and even worse, investing
myths which -- if taken seriously -- could be hazardous to
one's wealth.
Read enough online stock market chat, and it becomes clear
that investing myths of the 'Net fall into a handful of basic
categories. What follows are the top seven myths and why, if
you encounter one, you should take it with a gigabyte of
salt.
* Myth number one. The exchanges are rigged by the big
investors who use their market power to take advantage of the
little investors -- especially those who gather on the 'Net.
Given the populist, grassroots origins of Web culture, it is
understandable that an "us against them" mentality would crop
up to explain stock price movements. Many of the online
explanations as to why stock prices move, however, border on
the absurd.
To explain why one stock was drifting lower, a chat room
participant this winter opined that the "big fund managers"
were spreading rumors to scare away the small investor, so
that the managers could buy more shares at a lower price.
Other fund managers are accused of talking up stock prices so
they can unload them at a higher price.
It is true that these kinds of activities were common in the
Dark Ages of stock market history (before securities
regulation of the 1930's), when pools of investors or trading
specialists could easily "paint the tape," or talk up a stock
and then dump it on the unsuspecting public.
"I'm not so sure that money managers can do that kind of
thing anymore," says Daniel Weaver, an assistant professor of
finance at Milwaukee's Marquette University. These days, even
though unscrupulous brokers still cheat investors and market
makers have a short-term advantage over other investors
because they know the positions in their book, few
commentators believe money managers have the power to
manipulate stock prices for very long. There are just too
many participants in the market.
Besides, in the long term, stock prices are driven by the
underlying fundamentals of the company and earnings, notes
John Lawrence Allen, a California-based securities litigation
attorney who represents investors throughout the U.S. "If you
invest for the long term, the vagaries of these manipulations
are going to be washed out."
So blaming a price movement on a presumed collusion among a
group of money managers means you might risk overlooking the
real reason a stock price is moving -- and perhaps why you
should be getting out.
* Myth number two. Technical analysis of stock price
histories can lead to easy winnings. In technical stock
analysis, known as TA in chat rooms, investors use past stock
price patterns to predict future movements. Given the
technical orientation of many in the online world, it is
understandable that they have an affinity for technical
analysis. Unfortunately, many go overboard and put too much
emphasis on the technique, raising it almost to the level of
religion.
Anyone who does so risks losing lots of money, since
technical analysis should only be used in conjunction with
other essential forms of stock evaluation, like a close look
at the fundamentals of a company and its sector, points out
Jim Freeman, a professor at Columbia Business School.
Usually, professional investors will turn to technical
analysis to help chose the right time to move into a stock,
after more basic company analysis has already lead them to
the conclusion that they want to buy it.
"If you are telling me people are trading purely on charts,
then they have to have an exceedingly rare talent," says
Freeman. "I would have a hard time believing that there is
any technical analysis computer software that is going to
make a broad group of people lots and lots of money."
Others close to the online investing world agree. "I am just
totally amazed that people place so much meaning on these
dots," says Jim Leon, an assistant professor in computer
sciences at Northern Illinois University. "If you could
predict stock prices based on charts, do you realize how much
money you could make?" In addition to surfing the 'Net for
investing insights, Leon doesn't mind dropping in on
technical analysis discussion groups from time to time to
throw cold water on the enthusiasm. He is often duly flamed
for his efforts.
Investors looking for tips on the 'Net, therefore, should be
wary of the purported technical analysts who use a lot of
jargon to make themselves sound like they know more than they
do. On January 22, for example, in a discussion group on
Centennial Technologies (NASDAQ: CTN), one self-described
technical analyst wrote: "CTN is forming the lower triangle
reaching close to the Apex at $35. The volume is thinning.
Within several days my guess is that it will break up toward
$40, after the thinner volume is observed."
Within several days the stock plunged to the low 20s. (A few
weeks later, virtually all value vanished as the stock sunk
to around $2 on news of fraud at the company -- see Money
Daily for Thursday, February 20, 1997, "Fall from grace: A
once hot high-tech firm to get booted from the Big Board" at
pathfinder.com
e.html).
Anyone tempted to rely too much on technical analysis should
also note that online discussion groups on the subject are
often superficial, or worse, meaningless. One discussion
group heading was the following Zen-like tautology: "A trend
is in effect until it changes." Huh?
* Myth number three. Wall Street analysts are scourges who
deserve nothing but disdain. An October comment posted to a
tech stock site sums up one certain 'Netview of analysts:
"These guys are wrong a lot more than they are right. That's
why I think they are bozos, and I do the opposite of what
they recommend in many cases."
Others go so far as to speculate that Wall Street investment
houses encourage contrarian analysts to speak badly about the
market so that investors sell and generate more business for
brokerages. One commentator on the 'Net claimed the
brokerages support known contrarians like Oppenheimer's
Michael Metz, independent money manager Jim Rogers (who
appears regularly on CNBC), and independent money manger
Elaine Garzarelli, "because they help generate volume and
therefore commissions."
While stock analysts clearly do face potential conflicts of
interest (see Money Daily for December 19, 1996, "Don't judge
a book by its cover: Analysts' reports don't always tell the
whole story" at
pathfinder.com
ne.html), following this cynical point of view would
discourage an individual investor from consulting valuable
aspects of the research that analysts produce, such as
earnings estimates, or even the historical performance data.
Many reports also contain useful analysis of a company's
sector or product line. At the very least, it is important to
be aware of what analysts are saying about a stock, since
their views -- rightly or wrongly -- can influence the
market.
* Myth number four. There is easy money to be made in
investing. One discussion group begins with the following
fairly simple proposition. If participants manage to pick
"just one, yes ONE stock per month that would bring in a
return of 50% by the same time the following month," they
will all get rich quick.
The reader is invited to consider the math: Starting with a
minimal investment of $2,500, investors would have over $1
million by the sixteenth month. "The multiplication is
fascinating and will create wealth for us," the discussion
group leader points out.
And it is a good thing that the multiplication will bring
riches, because the investing approach won't. Many
professional money managers would feel fortunate to pick one
stock that returns 50% in a year, let alone in one month.
Despite the naivete of the investment proposal, the
discussion group had over 150 postings within ten days.
Beware of formulas that sound too easy -- they probably are.
* Myth number five. When an investment newsletter advises you
to buy a stock and it then loses all its value, you can sue
the advisor to get your money back. The truth is, unless
there was deception or an undisclosed conflict of interest
(like the acceptance of payments from a recommended company),
there is not much chance you can sue to regain your losses.
"There is no law against being wrong," says Joseph
Grundfest, a former commissioner at the Securities and
Exchange Commission who teaches law at Stanford University.
"There are laws against fraud and being dishonest. But if a
restaurant reviewer gives a favorable review to a restaurant
and I go and I hate it, what am I going to do, sue the
reviewer?"
Newsletters are acting as registered investment advisors, and
as such, they are subject to the anti-fraud rules of the
Investment Advisors Act, points out Stephen J. Friedman, an
attorney with the New York law firm Debevoise & Plimpton,
which specializes in securities law. "They can't be sued if
they are acting with due care, and in good faith."
* Myth number six. Any bad news circulating about a stock is
really just a rumor by short sellers. Short selling is when
someone sells stock he or she doesn't own, agreeing to return
the same number of shares to the owner at a later date. This
is a bet the stock price will decline, making the stock
cheaper to buy when it comes time to return it.
Since short sellers benefit from price declines, they
sometimes do try to talk a stock down. But more likely, bad
news is just that: bad news. Any investor lulled into
thinking bad news is just a rumor circulated by short sellers
risks losing a lot of money when the rumor turns out to be
true.
* Myth number seven. Investors can make easy money by setting
"dip nets" to catch stocks at temporary lows, and then sell
them again when they bounce back to their normal trading
range. In fact, setting dip nets, or limit orders at prices
near or below the bottom of the current trading range is a
dangerous practice. If a stock goes through the floor because
of some bad news, you will pick it up all right.
Unfortunately, you will have bought it at the beginning of a
long ride down. Limit orders set below the current trading
price for a stock you already own can be a useful form of
defense to stop losses. But beware of leaving limit orders
open as a way to purchase a stock.
In general, investors cruising the 'Net for investment tips
should be wary of anything they read. Much of the information
is simply wrong. One chat room participant posted a message
saying that a certain mutual fund planned to sell its huge
position in a company over the next three months, so it would
be good to sell the stock now and get out ahead of the
selling pressure from the fund. When questioned about his
sources, the investor referred others to a document on file
at the SEC's Edgar database. The document, however, was
simply a notice the mutual fund had to file because it held a
large position in the stock.
Of course, there is a lot of useful investing advice on the
'Net, too. "People say the Internet is all hype when it comes
to stocks," says Leon. "I find it not to be hype at all. You
can get a lot of information about companies and the people
in them."
Last summer, for example, Iomega chat room participants were
posting messages that IBM was about to begin using the Iomega
zip drive -- about two weeks before the formal announcement
propelled Iomega stock from $37 to $44, says Leon. "That
information was available nowhere else." Leon says he also
benefits from the technical expertise of many participants in
'Net discussion groups to better understand the computer
industry.
Participants in chat rooms also swap news articles and
analysts' reports, or even the numbers and codes needed to
participate in conference calls, which are informative
discussions held on a regular basis between top company
executives and analysts.
The level of 'Net-based discussion about a stock in chat
rooms can also serve as a kind of contrary indicator.
"Usually when everyone is talking about a stock and there are
fifty message threads on it, that is when it is due for a
fall," says Leon. "I look for stocks that do not have a lot
of talk on them."
Sometimes the 'Net is just a good source of folksy adages
that drive home useful investment concepts. Professional
investors know that the best time to buy a stock can be when
it is out of favor and everyone avoids it, and the best time
to sell is when investor fervor is at a pitched level. In
other words, as a posting to one thread points out: "When
everyone's cryin, ya better be buyin. When everyone's yellin,
ya better be sellin." |
