Beware “pump and dump.”
There are many tips and tricks to being a good investor, but chief among them is caveat emptor — buyer beware.
After all, we can malign high-priced active managers who underperform the S&P 500 index SPX, -0.68% until the cows come home. And we can worry over whether Republicans will gut regulations meant to protect small-time investors. But at the end of the day, it’s your money and ultimately your decision what to do with it.
So choose wisely.
I’m not just talking about choosing your investments. In this digital age there are hundreds of places to get your financial news, and that choice can have a big impact on your strategy, your worldview and your portfolio value.
That’s not necessarily a good thing, nor is it good for your portfolio.
This week, the Securities and Exchange Commission brought action against 27 stock pickers who were compensated by publicly traded companies to tout their shares. These tactics targeted penny-stock medical companies in a typical “pump and dump” scheme akin to “Boiler Room” where overly optimistic commentary is designed to pump up shares so insiders can dump their shares for a profit… and leave unsuspecting investors holding the bag.
So how can you be sure the investing news you’re reading is legit? Here are a few tips:
Look for links to primary sources: Trustworthy financial news sites link to their sources when making claims, for example, that first-quarter GDP is weak. Fake financial news sites just spout off without showing any real data. Be particularly wary of echo-chamber citations where claims daisy-chain to other articles, perhaps on the same site or by the same author, that have similar headlines but also are founded on unsupported claims and no true facts to back them up.
Look for context: Unfortunately, a picture of a chart or links to real data don’t always tell the whole story. For instance, consumer staples stock Kellogg K, -0.53% is up 40% or so in the last 10 years excluding dividends. Not bad! Except the S&P 500 is up 60% or so, and peer General Mills GIS, -0.71% has outperformed with 100% returns. In a vacuum 40% may look nice, but it doesn’t tell the whole story.
Look out for cherry-picking: Is gold GLD, +0.48% really a “store of value?” Use a chart dating back to 1980, after gold’s surge across the 1970s ran out of gas, and the answer is no. But since 2000, thanks to the dot-com crash and financial crisis, goldGCM7, +0.94% has actually outperformed the S&P 500. So it all depends on your time frame.
Also, you should keep in mind broader market trends that provide tricks of timing — such as the magical bump in five-year performance many small-cap managers saw in 2014 after they were conveniently five years removed from the bear-market lows. That kind of round-number cherry picking is less sinister than hand-selecting the best window, but is still important to guard against.
Look for identified sources: There are times when an anonymous source makes sense, such as a corporate whistleblower who could face retribution. But if someone is just running their face about what to buy in the stock market, the least they can do is let you know who they are and what their pedigree is. It’s no surprise that the recent SEC case involved authors writing under a host of pseudonyms and even generic monikers like Trading Maven and The Swiss Trader. If you can’t be sure the author is real, you can’t be sure their advice and commentary is real either.
Look for (verified) track records: I don’t ever expect marketing for financial products to be fair and balanced. After all, they are advertisements and designed to focus on successes. But the more honest stock pickers keep an open track record or at least revisit trades regularly — as I do here on MarketWatch at the end of each year. If you can’t find a truly open track record, you can often reverse-engineer one by looking at the date of previous calls and seeing how they worked out.
Additionally, there are watchdogs like Mark Hulbert who rigorously track the performance of stock pickers over the long term. In this age of information, you can and should demand investment advisers prove they know what they are talking about.
Avoid commentary on microcaps: The SEC case is a reminder that stocks valued at less than $100 million or that trade only a few million shares each day are the playground for scam artists and thieves. Honestly, there is no reason I can think of why someone would invest in penny stocks unless they want to simply gamble their money away… and I can’t imagine why someone would cover penny stocks unless they want to fleece you along the way. As a rule, I don’t ever trust sites that spend their time talking about this seedy underbelly of the stock market.
Avoid commentary by robots: Increasingly, the web is populated by robot-written stories that seek to spit out content based on financial data. Most are just painful dumps of performance metrics, earnings data and analyst price targets without context. The worst are unreadable laundry lists of SEC filings in all caps because the feed doesn’t alter anything, null datasets because the algorithm got confused or simply silly structures that include calculating market cap out to the penny like that is somehow more precise.
If you want data, go to a quality site like Finviz or Barchart instead of getting the numbers in a clunky narrative form. The only reason a website would put up stuff this is because they want the cheapest possible form of content to serve ads on — not because they care about your IRA balance.
The challenge, of course, is that even a “good” investing idea that is well-researched can lose you money. And similarly, those stock-pickers who have a proven track record of outperformance could suddenly go on a cold streak.
Doing these seven things isn’t a guarantee you’ll be a better investor. But you certainly will be a better informed one.
Now read: Fake-news fraudsters find new ways to trick traders[“Source-marketwatch”]