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EScroogeJr (< 20)

stock manipulation and a case for laissez-faire



December 30, 2007 – Comments (2)

An interesting post by cubanstockpicker:

When we see an attempt at stock manipulation, our first reaction is righteous indignation. Hence the avalanche of impractical suggestions: investigate manipulaters, track their IP addresses, police the boards, ad nauseum, ad infinitum. Now, if you think of it a little more, it's easy to see manipulation for the scarecrow that it is.

First, how immoral is this practice? The answer: not any more immoral than the job of sales representatives, advertisers or real estate agents. Sure, the manipulator's goal is to convince honest hard-working individuals to sell their investments cheaply or, on the contrary, to overpay for crap. Sounds horrible? But we have millions of people employed in the advertising industry whose sole purpose is to trick consumers into overpaying for stuff they wouldn't buy if the logical neurons in their brain hadn't been blocked by the ads. Commercial ads are not at all different from the posts of stock pumpers. Both  but clumsy attempts to part you and your money made by people who are getting payed for it. Objecting to the one, but not to the other is a classic case of double standards. It seems like we want objectivity for the folks like ourselves and manipulation for the lower classes whose purchases are supposed to make our stocks succeed.

Not that you have to become a victim of either scam. Manipulations can succeed only as far as you are ready to fall for the trap.  I don't watch TV, so I'm not afraid that some paid manipulator will trick me into buying a fancy car that I have no reason to own. Ditto for the message boards. By ingoring the posts that offer "insider information", unsubstantiated statements, or such valuable hints as "this stock is going up/down $6 tomorrow", I can sleep well at night, knowing that my decisions have not been influenced by pumpers or bashers. 

Of course you may say to this that manipulaters can be more subtle that that. They could, for example, present a well-grounded bullish/bearish case for the stock, where the facts are true, but the poster has an ulterior motive. This is very possible, an I'm gure it's happening all the time. Guees what? I don't mind such posts either. As long as they inform me about some issue with the company that was unaware of, they are actually useful. If the poster got payed for it, so what? A valid argument will not become any less valid because the poster was payed to post it. A bad argument will not become any better for the fact that the poster had no ulterior motives. So my suggestion if to focus on the quality of the arguments instead of guessing at the motives of the person who is making the argument. 

Besides, misleading message board posts is not how stocks are actually manipulated. The main tool in the hand of the manipulator is buy and sell orders that are intended to move the price of stocks with small float. Most people buy and sell stocks based on daily, weakly, or monthly fluctuations the see on the chart.  The contribution of manipulators' posts is relatively minor. There are cases when a PR attack causes dramatic movements in the stock price, but this only happens to stocks that had issues to begin with. Think of SOLD and IIG, both of which have been attacked by StockLemon. StockLemon's muck-racking succeeded in both cases because the criticism was richly deserved. Both stocks were ready for a haircut and only needed a catalist. If it were not for StockLemon, the end result would be the same, only it would have taken a little longer. On the other hand, if these companies did not have issues with churn rates and fraudulent business practices, StockLemon would either have to invent a lie that would be immediately disclosed, or to ferret out some minor blemish that would not impress anybody into dumping the stock. Stock bashers are like jackals who are only dangerous to the dying animals, and like jackals, they have their role in the ecosystem.

Another thing is that most posters have their ulterior motives anyway. As you might expect, most of the bullish posts come from the longs, and most of the bearish posts come from the shorts or from the longs looking for a better re-entry point. So you can hardly expect these posters to be objective. In fact, a long who bought something like ONJP.OB looking forward to the immense riches that should come from the ownership of this multi-bagger will do a better job pumping it than any professional pumper is capable of. Every stock has an army of volunteer pumpers and bashers who are doing it for free and who sound more convincing if only because they really believe in what they're saying.

If you feel inclined to blindly follow every post you read, then you shouldn't be railing against manipulators because no amount of transparency will help you anyway. And if you're able to think critically but still worry about becoming a victim, may I suggest that manipulation is the last problem you should worry about. Whatever offences these bad guys may be guilty of, 99% of the damage done to investors should be attributed to the self-destructive practices of emotional trade decisions, buying on hype, and failure to read the quarterly reports.

2 Comments – Post Your Own

#1) On December 31, 2007 at 12:11 AM, StockSpreadsheet (64.37) wrote:

Nice post.  Well said. 


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#2) On January 01, 2008 at 4:31 PM, dwot (29.45) wrote:

Very well said...

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