Sunday, July 22, 2007

ADA: Don't Take Advice From the Newspaper

Alternate Dimension Andy (ADA):

Now you're all, "Sweet! I'm totally gonna make a hojillion effing dollars in the stock market!" and I'm all, "Sweet! How?" then you're all, "By following all the hot tips in Money Magazine!"


I want you to stop and think this through. What is Money Magazine's ultimate goal? Or Fortune? Or Forbes? Or the Wall Street Journal? Mad Magazine? Ans: All of those publications are owned by businesses who want to make money.

How do they make money? Ans: They sell ad space; the larger their readership, the more they can charge. (They also sell magazines or newspapers, but the points I'm about to make apply to all media, even free websites and television shows.)

How do they increase their readership? Ans: With cover stories like "Stock Picks So Good They Will Fuck You Up For Life," not cover stories like "Research and Due Diligence Are Key."

In reality, financial journalists are doing research; they're not intentionally lying or anything. But:
  • the journalists don't have a crystal ball.
  • if a journalist did have a crystal ball, she likely would not be making her money as a journalist.
  • if a journalist can't find anything with a really predictable trend (hint: nothing is predictable in finance), she's still obligated to write an interesting story.
  • if a journalist actually finds a good stock and gives a SWEET PRO TIP, her story will be indistinguishable from the filler.
Kinda sad, I know. You wanted the mags to be all sexy. Sorry.

Consider this too: suppose that one morning you open the newspaper to the business section (see how much credit I'm giving you ADA? I've assumed you're literate!) and read an editorial or some shit that says, "Horace's has announced plans to sell their products in France, goatee capital of the world; OMG BUY NOW." Holy balls! Sounds like a good time to go out and buy some shares of Horace's!

Of course, this was announced in the newspaper, and there will be lots of people who have read the same editorial. They'll want to buy too. (In Economics, that's called an increase in demand. When demand increases and supply remains the same, price increases. This concludes this month's installment of Facts You Already Clearly Understand.)

And pretend you were on the other end: you own shares of Horace's when they make this announcement. If the announcement means that Horace's is 50% more valuable (thereby making the shares 50% more valuable), would you sell your shares for anything less than the new price? (Ans: No.) Hell, even if you didn't think the shares were more valuable, the fact that you know a lot of people are going to be trying to buy it might be a good excuse to overcharge.

After reading the editorial, if you go out and buy shares right away, chances are good you're either going to get them at fair market value or be overcharged for them. Chances are quite bad that you will buy them at discount, then turn around to make a 50% profit in the next week.

ADA, you can't listen to the financial media for "hot picks"... or "hot pics," for that matter. They have failed us in both departments. Most of the time they're just trying to sell ad space. Not to mention that if a story creates a crowd, there's pretty much no way you're going to make money off of it.

You're going to have to find a different strategy for picking stocks. I hate to say it, but you may have to think for yourself.

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