Tuesday, March 30th, 2010
days of dreck

Fresh from a piece on how to keep your distance from the “narrative power” of well-told tales, the research puzzle | Short version of that posting:  Look for a diversity of inputs and be skeptical. I had expected my next posting to be about something completely different.  But I can’t leave the topic without commenting on the hucksterism currently on display by those who promote the market junk pile, or by those supposedly reputable purveyors of ideas that adopt the same kinds of techniques.

For whatever reason, it seems as if hype is in full bloom right now.  Although much of the evidence supports the view that post-crisis (and post-Madoff), the average investor has become more cautious, the claims of easily-available riches seem to get wilder by the day.

In years past, the pump-and-dump and other boiler room specialties were executed primarily via phone.  I’m sure that they are still out there, but thankfully they don’t call me.  I do get mail from shysters, however, and it has picked up quite a bit of late.  I feel lucky that newsletter writers who have generated “stunning” results are willing to share their future ideas with me for a small fee.  (“My #1 Natural Gas Stock Pick Could Hand You 500% Profits Before the Year is Out,” the one I received yesterday helpfully proclaimed.)

Also in with the bills (wouldn’t some “found money” come in handy?), there might be a glossy brochure touting a stock.  The fine print, if you bother to read it, says that the substantial cost of the mailer was paid by an entity that holds a huge position in the shares being discussed, and which also has compensated an “analyst” to write the putative research piece you have in hand.  The fantasies of spiking prices and untold wealth are found in larger type.

In addition to those old-fashioned methods, much of the racket has gone high tech and social, and the unsuspecting are being played masterfully.  As always, there are many variations on the con.  What is common among them is that all the electronic village needs is some movement in price that grabs its attention and the game is on.  “Some movement in price” can be remarkably easy to come by.

On Monday, Servidyne (SERV) hit the screens of the thrill seekers.  The initial pop was triggered by the company; it went vertical from there.  I did a quick look at the firm to see what all the fuss was about.  There was news of a contract with an unnamed retail outfit.  The incremental market cap on the day soon far exceeded any likely economic benefit from the deal, unbeknownst to those trying to catch the move.  They also weren’t aware of the company’s woeful financial history or question marks about its governance, or that a director bought before the news release and others were awarded “stock appreciation rights” in the nick of time.  Right on schedule, research reports from a couple of questionable sources touted Servidyne’s prospects.  Wasn’t that convenient?

The predator in me says I should just get in the business of shorting this garbage.  (I have been keeping a list of stocks that fit the profile, and so far they all have gone down — in a rising market.)  The educator in me thinks that I have to figure out a way to get the message out to the unsuspecting before they become victims.  The wanna-be regulator in me believes that we need to crack down in some way on these abusive practices.

The really sad part is that these promotional tactics are common and have been adopted to a degree throughout the business of investments.  Most paid-for stock research is simply PR.  Some of the biggest names in investment management send out messages with exaggerated claims and carefully misleading performance information, so what’s the difference between that and this?  Online forums are full of grifters and their marks, yet even reputable sites with worthwhile editorial content are making money from advertising networks that serve up banners and links that hype dross and dreck to their readers.

Understandably, many people felt stung by big investment firms over the last decade and are trying to go it alone.  Often they don’t realize that the promise of empowerment makes them susceptible to a whole new set of risks, especially if they trade based upon technical breakouts, which sometimes are manufactured by others.