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Beware of Stock Market Commentators

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August 13, 2009 – Comments (0) | RELATED TICKERS: AAPL , NOK , BB

Listen to stock market commentators with caution. You can learn from them, but even the most popular and highly respected stock market commentators frequently give bad advice. Here are some of the most common ways they mislead:

1.  They make short term forecasts. Nobody knows what the market will do in the immediate future. Nobody knows what a stock will do in the immediate future. But investors wants to know, so talk show hosts pump guests for answers. No matter how authoritative the source, ignore the answer.

2.  They focus too much on earnings and too little on revenues. They are impressed by an earnings increase even if there was a drop in revenues. A company can pump up current earnings by cutting product development, image advertising, and customer support, but there will be unpleasant consequences in the next few years.

3.  They imply that there is a strong short-term connection between the economy and the market. While it is true that the market and economy move together over the years, they go their separate ways in shorter time spans.

4.  The market precedes the economy. In fact, the S&P 500 is one of the so-called "leading indicators," so making a market forecast based on economic analysis is especially foolish. Nevertheless, pundits frequently start by talking about the economy and end by predicting whether the current market trend will continue or be reversed. 

5.  Most short-term market moves are the result of many overlapping fundamental, technical, and psychological forces. Nevertheless, pundits try to relate every market move, even intra-day, to a news item. News cannot cause a move unless it is unexpected and unambiguous. However, most news is predictable, and even when unexpected is subject to interpretation which can make it seem either favorable or unfavorable.

6.  They seem to think that the world economy is dominated by the US, whereas the US economy is only about one-fourth of the world economy. For example, pundits might lead you to believe that Apple (AAPL) and Research in Motion (RIMM) are beating Nokia (NOK) in smart phone competition, when actually Nokia is the leader in global market share.

7.  They think a rip-roaring stock market is a sign of a healthy economy, but it is actually a sign of an insufficiently regulated economy. Good regulation prevents asset bubbles, and results in a restrained stock market. China punctured its stock market and housing bubbles by choking off credit, and is now growing strongly while the US and Europe, which ignored their bubbles, are slowly climbing out of a deep recession.

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