Internet, Investing and We

There's this nice little book by Dr. Richard Geist called Investor Therapy. Wallstraits.com had an article based on this book some time ago: Investing In the Internet Era

Here's a snippet from the Wallstraits.com article.

...Psychologist Richard Geist says, 'These new communication processes are restructuring how we do business, how we form social organizations, how we relate to one another, how we understand ourselves, and how we invest.' Psychologically, the Internet (stock chat sites) facilitate random intertwining of people, machines and organizations. We can communicate in spaces (cyberspace) instead of places. A single opinion, valid or self-serving, can be spread to millions of anonymous readers instantaneously. Dr. Geist points out some important implications of this phenomenon that we should all consider.

First, in the new economic era we will continuously perceive large groups forming around us, thus exacerbating the pull toward crowd behavior. Whenever investors feel uncertain, they turn to the Internet, an electronic space that provides information (erroneous or not) to support any view they want to confirm. As reliance on this new aid to decision-making increases, crowd behavior is exacerbated.

Second, the pressures of the herd increase geometrically when there is a live community voting for decisions in real time. As a result, investors will have an increasingly difficult time resisting the influence of the herd at major turning points in the market. If you turn to a stock message board just before making a trade-- even when you've done intensive research-- it can be extremely difficult to resist the impact of the most recent ten messages discouraging you from buying your stock.

Third, in between turning points, when in the past the herd has often been correct, major whipsawing of small investors can be expected. Internet message boards are full of innuendo, hype, puff, and paranoia, to say nothing of intentional misinformation. This means that investors will be easily influenced to act contrary to the herd at times when they are safer remaining a part of the group, and they will be pushed to remain part of the group when they should assume a contrarian stance.They will be influenced in and out of positions with a kind of volatility not seen before on such a mass scale.

Another way of thinking about the effects of cyberspace on investing is to consider psychology's three traditional areas of expereince: the external world, our inner world, and the boundary that separates them. The external world refers to our perceptions of our surrounding environment; our inner world refers to our fantasies, daydreams, and emotional reactions; and the boundary that separates inner from outer is our skin. Individuals become disoriented and upset when the skin fails to maintain the boundary between inner and outer.

Interesting isn't it?

Do you agree that the herd mentality exist in internet investment forums/message boards/groups? Take the most knowledgable, intelligent person in that group, should one follow the investment idea suggested by that most knowledgeable, intelligent person? And when the majority of the group agrees with that stock selection, should one follow because everyone else believes in the suggestion?

And the last part, this I think is rather interesting. I had a comment back in this blog posting, Sun Tzu: Grandiosity . Anon mentioned the following: "By monitoring the guru prediction, it will be very useful to take the contrarian approach when they are falling out of favour. One of the most useful good indicator to be incorpareted in one's trading approach."

Compare what was commented versus Dr.Geist remarks.

Internet message boards are full of innuendo, hype, puff, and paranoia, to say nothing of intentional misinformation. This means that investors will be easily influenced to act contrary to the herd at times when they are safer remaining a part of the group, and they will be pushed to remain part of the group when they should assume a contrarian stance.

Now Anon has suggested to use the contrarian approach when a so-called stock guru is falling out of favour, while Dr.Geist remarks that because the investors belongs to that internet investment forums/message boards/groups, the investors are subjected into a situation where they are influenced either to act contrary to the group or to follow the group decision. The alternative? Why do we have to act for or act against the stock selection? Since so many other stocks avaliable, why can't we just avoid?

Have you seen internet boards being subjected to mainly one stock investment idea? Why this one stock? Well, this is the popular stock being championed by the leader or the so-called most intelligent person in the group. Now in regardless of whether this stock selection has its merits and justifications as an investment grade stock, the interest on that stock has been created. And the members of this group is then being subjected to act for or act against the stock.

Now this plummeting stock could also cause unreal danger. This is as suggested by Dr.Geist, investors will be influenced to act contrary. For example, if the stock guru had been suggesting a buy on the stock at 1.20. Now what if the stock plummets to only 60 sen. Wouldn't this influence one to buy at 60 sen? The popular thinking would probably be that if the guru called a buy at 1.20, at 60 sen, how wrong can one be? For a stock to plummet from 1.20 to 0.60, commonsense will tell us that something is seriously wrong with the stock. Right? For example, the stock's fundamentals are simply decaying. A continuous decline in net profits could easily cause a stock to plummet so badly. And the next danger? What if the decline in earnings turns into a loss in earnings? Not possible? Or what if the losses continue for a prolong period? How would one rate the probability of it not happening? And what will happen to the stock price then? Will it plummet some more? Dare we take such risk? And is it even wise to take such a risk?

How?

So, do you think that investing is a game of follow you, follow me?

How does one rate such investing strategy? Is it true that many poor investment results occured because investors joins chatrooms/email groups/stock forums/message boards in search of investment idea(s)? The search for an investment guru so that one could follow and benefit from the guru's stock picks. What if the so-called investment grade stock reasoning is simply flawed? Not possible? Even stock legends like Warren Buffett acknowledges and admits to investment mistakes. As long as there is a crowd following a so-called sifu of a chatroom, it is deemed that the investment is good. And worse still, they refuse to believe that their worshipped sifu could be wrong!

Oh, and even if the so-called guru knows that they are wrong, would they ever admit to his or her followers in the group? For if and when they do admit they are wrong, wouldn't it create a selling-panic of some sort within that group?

Here are some possible risks when one picks up investment ideas from stock message boards

1. Vested Interests. Guru buys the stock at 0.80, and they only SHARE their idea to you at 0.90. And then because there is a crowd instinct acting upon it.. the stock goes up to 10% to 0.99. But the originator of that idea cost is only 0.80! Who benefits more? The stock guru or you? Or is this (vested interest and stock guru profiting) all ok as long as we also profit from the stock investment idea(s)? But what if we don't?

2. Some stock investment ideas are ACTUALLY based on speculations. Wouldn't it be silly to invest in a stock when the stock guru is merely speculating on the stock?

3. Some stock investment ideas are ACTUALLY based on very poor fundamental reasonings. The faulty stock selection issue. Actually, I have seen it happen quite often. The fundamental reason itself to buy the stock could be based on wrong data. For example, the earnings could be boosted by one-off earnings but the originator of this idea had failed to recognise this fact. How? If you follow you follow me, then it would a simple case of a blind leading the blind! So do check the facts. Just the facts. (and i have seen cases where the reasonings is so good that it blinds the actual facts!)

4. The right reasoning or the right stock movement? Sometimes one would read in message boards why certain stock is not worth investing in. But it does not necessary means that stock is going plumment to the deep blue sea cos as everyone knows anything could happen in a stock market. Rotten stocks can sometimes go up if there is manipulations. How? Which is more important? The right reasoning or the right stock movement?