Investing Classics: RUMOURS are Contagious!

Here is another investment classic from Wallstraits. ( Sorry I have lost the link)

RUMOURS are Contagious!

There's something really potent about rumours and how they spur people into action. Especially when delivered with minimum information and maximum excitement and conviction, and if you do not allow people to ask questions. Keep the conversation very brief. The trick is to shout something like this, "Hey, buy this stock NOW NOW NOW! Has to be today - before lunch time. Just do it, okay? Make sure it's before lunch otherwise it'll be too late."

Guess what will happen next? The recipient of the message will be in a panic mode (Wah! Very hot tip! Quick! Quick! Must buy now!).

Two things will happen right after the Message from the "Prophet": (1) key in your own trade online, or call your broker/remisier and get him to buy at least 10 lots of the stock before lunch; (2) call your husband/boyfried, mom and dad, best friend, and whoever you're really fond of at the moment, and say in a serious conspiratorial tone, "Hey, GUess what? I've got a hot tip for you. Just go and buy this stock today. Make sure you do it before lunch, okay?"

By this time, your remisier and broker will be feeling extremely uncomfortable, like someone who hears about a big office party and was the only one who did not received an invitation. They'll call their friends who're traders in other brokerage firms, and ask them what's the deal with the stock. Your parents, the proud second-hand recipients of the "hot tip" will be calling their best friends and relatives to buy as well. The reason? "My daughter/son told me to buy. Don't know the reason. Don't ask so many questions. But very good tip. Must buy before lunch."

The stock moves up 10 cents right after lunch. Everyone is happy. End of the day? The stock price has dropped a dollar! Ouch! Ouch! Ouch!

A flurry of calls will follow, and we can just imagine the conversation: "Aiyo! What kind of hot tip is this? Lousy one lah! I thought you told me it will go up? How come it went down one dollar? I just lost ten thousand in half a day!!!" You call your Prophet frantically and when you get hold of him, and try to get the reason for the stock's non-performance, the answer will probably be, "I thought ....but they told me..."

Then you wonder, why didn't you ask him who they are, or why he thought it was a great stock and that the price would go up, before you ran out and told everyone you knew to buy the stock. Now, not only is your reputation down the drain, you've lost quite a few friends, plus ten thousand dollars too!

And the moral of the story is...?

1. As much as rumours are thrilling and spice up an otherwise boring day, minimize your indulgence. If you want to follow, don't buy 10 lots. Buy just 1 lot, so if you lose, it will not be that painful a lesson.

2. To sound like a Guru is a great ego-booster, and with everyone salivating at your 'hot tip' like some juicy story about a friend of a friend who did it with a goat. But it could very well backfire - just like malicious gossip!

3. Investing is boring and slow. Like deep sea fishing. But like deep sea fishing, if you're patient and stick with it long enough, you will get a big fish! For people who want to punt and make a quick buck, you could end up with nothing or some little shrimp.

4. Do your own homework. It's easier to listen to someone than think for yourself. But at the end of the day, it's more profitable and you'll get more satisfaction if you exercise independent thinking.

5. Just don't do it. Avoid it like the foot and mouth disease.

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You might be interested in this other posting.

1. Investing Classics: Deadly Sins Commited By Investors