My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Tuesday, January 11, 2011

Stock Message & Chat Boards

As someone who enjoys monitoring stock message boards and online forums, I am going to give you my opinion on how to utilize and monitor these boards.

My first piece of advice is to assume any non-factual post on a forum is self-serving – i.e. if the post is not factual information from a press release, issued financial statements or a document on Sedar or Sedi, you must be skeptical of the poster’s intentions. That is not to say that most posts are disingenuous, but you must start with the presumption they are disingenuous.

You must always be aware of pumping and dumping. This typically occurs with thinly traded stocks where someone purchases the stock and then, usually under several aliases, posts great things about the stock on stock forums. There have been cases of this in the US, the most notorious involving fifteen year old Jonathan Lebed who bought thinly traded stocks and flooded market forums with messages touting the stocks. When he achieved his goal of pumping the stock he would sell. He supposedly made over $800,000 in this manner until the SEC caught up with him and he negotiated a $300,000 settlement without admitting any wrongdoing.

Once you have accepted that you must be skeptical of every post, you then need to weed out the, how shall we put this, “the less intelligent posters.” Most boards have a significant percentage of unsophisticated posters who really have no idea what they are doing or saying. Weeding those investors out is the easiest part and you can just simply put them on ignore. What is trickier is ensuring the intelligent posters have no vested interest other than a community discussion on the merits of a particular stock.

There is no shortcut in determining which posters you should follow. Most forums allow posts to be recommended, so you should start with the most recommended posters, but recommendations are sometimes based more on quantity of posting than quality, so that is not enough on its own.

You have to read posts to determine the knowledge of the poster and the quality of the posts and, after a while, you begin to grasp which posters are worth reading. This can take months or even years. For example on the Investor Village board, I have always read the posts of a certain poster with interest. He has great knowledge in the Oil and Gas industry and over time has picked several winners in the Oil and Gas patch with one big miss.

Within stock forums, a Darwinian effect can even take place where better posters are hand selected to become part of private forums. This eliminates having to weed out the posters who have no clue what they are talking about.

Where private boards are not started, the Darwinian selection works well, since other excellent posters become attracted to those they perceive as intelligent and certain boards then fill up with good posters. For example, the poster I discuss above is like a pied piper, wherever he goes other intelligent posters seem to follow. A good board will have a mix of posters, some who are great researchers and find every piece of public information on a company, those that have an expertise in a certain field (i.e. are in the Oil and Gas business or are medical professionals following bio-tech stocks) those that can interpret legal documents and those that can interpret financial information. When a board has all those attributes, you have increased your odds with the investment as ownership of that particular stock is constantly questioned or reinforced.

Reinforcement is a major issue if you read message boards. The board can become so enamored with a stock that people lose objectivity as the posters each reinforce the brilliance of their investment in a particular stock and anyone fairly questioning that opinion if often treated as a “shorter,” someone who wants the stock to drop. Human nature being what it is, this is the hardest issue to safeguard against, as greed becomes contagious and the herd mentality overruns objectivity.

If one has the time or inclination, stock forums can be a valuable asset in monitoring your investments and finding new investment ideas. However, remember its caveat emptor or in this case, let the message board reader beware. 

Door in the Face

As I was walking into my office building last week I was behind a young woman. She opened the door, did not look behind her, and just kept walking. If I was not paying attention, the door would have slammed in my face. As I was taught from a young age to always hold the door open if someone is behind you, I find it rude when someone does not follow suit. Anyway, I did a little mental experiment and tried to follow close behind several people over the next couple days to see if they held the door. I would say it was about 70/30 in favour of those holding the door open. But, for those that did not hold the door, there was no indication that they even considered there was the possibility of anyone being behind them. I also found it interesting that in my non-statistically significant sample, it was younger women in general who paid no heed. I am not sure if that has any meaning, maybe they are used to having the door held for them.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

1 comment:

  1. Interesting comment about reinforcement. I am an Investor Village user and was part of a board for a stock we all expected to be a five bagger. The stock was sideswipped by news we as a board had never considered. In retrospect, I think the board as a group suffered because we had rose coloured glasses on.