The Stock You Can’t Miss Out OnSubmitted by Reby Advisors | Certified Financial Planners | Danbury, CT on April 21st, 2017
By Daniel Granucci, CFP®
Fake News has been a hot topic lately, with coverage focusing mostly on the political side of the news. Of course, what constitutes “fake” may be debated, as the label has been thrown around to describe stories ranging from pure falsehoods, to half truths, to biased reporting or omission of “inconvenient” facts.
However, let’s not forget that unreliable media coverage has always been a problem in the financial press, in a number of different ways.
Recently, the SEC filed a warning to investors on investor.gov about companies that have been paying writers to post favorable articles on major financial news websites. Their motivation was to increase demand for the company’s stock. The conflicts of interest were not disclosed in the articles.
An Example of Stock Price Manipulation Through the Media
The SEC warning reminded me of a call I received from a client about a stock she had read about for a company that was about to experience explosive growth. The business at this point was unproven and not generating earnings; appropriately, it was being traded for about a quarter per share. It was the type of penny stock you could buy thousands of shares for without risking too much of your nest egg. If she owned 10,000 shares, for example, and it rose to a reasonable-sounding $11 per share, she would get a six-figure payday. No one wants to regret not getting into the next big thing while the share price was so low.
Of course, my recommendation to her was to pass on the “opportunity,” not only because I generally don’t endorse those types of individual stocks but also because I did not trust the source of information. It turned out that the article where she had read about this penny stock was all hype, part of a pump-and-dump scheme. A pump-and-dump is when the owner of a penny stock touts the company’s merits with the sole intent of artificially increasing demand and later selling his or her own shares at a profit.
Common Conflicts of Interest in the Financial Media
“Media Response” is one of the nine most common behavioral mistakes that investors make, and it takes on many forms. Sometimes we feel inclined to buy or sell based on bullish or bearish “breaking news” reports that elicit greed or fear.
Other times, investors are simply misled. In some cases, it’s a stealth campaign such as those that resulted in the recent SEC warning or the aforementioned pump-and-dump. In other instances, someone in the press with a position in a particular stock may tout the company on the air or in a column.
Another example, which is a little bit different, are “special reports” on buying gold or other commodities. While the authors of those information products may not be attempting to sway the market value of gold, they understand that fear is a powerful motivator and use that emotion in their advertising to sell more newsletters or other information products.
How Can We Minimize Exposure to Conflicts of Interest?
First, let’s consider what the media generally does not influence: long-term performance. Over the long-run, stock prices have a very high correlation with company profits. So simply by focusing on long-term gains rather than short-term market timing strategies, we can avoid a lot of the pitfalls of being influenced by the media, and instead capitalize on the opportunities presented when fundamentals indicate an asset is undervalued.
In addition, by studying asset classes rather than individual stocks, we have less exposure to media manipulation. It would be incredibly difficult (if not impossible) to sway the price of an entire asset class with fake news or biased reporting. Furthermore, you not only spread your risk by diversifying across asset classes, but also diversify across many stocks within the asset class.
If you or anyone you know would like help navigating the current investing landscape, please let us know! We are here to help guide you to a more secure financial future: (203) 790-4949 or firstname.lastname@example.org.