A year ago, Apple stocks (AAPL) were trading for under $400 per share. Starting in January, however, the stock began a meteoric rise, climbing and climbing on good news and rosy recommendations by fund managers, especially Goldman-Sachs. Late in September, however, AAPL peaked at around $705 per share and began a just as meteoric slide, dropping further and further until today, when it closed at $525.62
I can't say with absolute certainty that Goldman or anyone else has been dishonest in their recommendations, but I'm dead certain that AAPL investors have fallen victim to one of the oldest tricks in the stock market: the pump-and-dump. Many investors trust their stock brokers to make educated recommendations, believe, as I've said before, that these folks who trade stocks for a living are much smarter about such things than Joe Blow, and that there's no way on God's green Earth that they could ever be dishonest in any way. Well.
The pump-and-dump operates on lies. A prominent fund manager will buy a large position in a particular stock, then begin issuing recommendation after saccharin recommendation to their clients that "STFU is an awesome stock, they've got great fundamentals, awesome management team, strong market, blah blah blah" and push and push their clients to buy this stock. As demand rises, so does the price. Prices go up and up, and investors believe that they really did buy into a great thing, and start buying more to improve their own positions. Then, when the price hits a predetermined trigger, the fund manager will sell all or most of his shares, taking a huge profit and sending the stock into a tailspin. One to three months out, and all those investors who bought into their fund managers' lies are left holding nearly worthless pieces of virtual paper, weeping and gnashing their teeth over their ill fortune. The fund manager whistles his way to the BMW dealership and starts planning his next big scam.
There's no way that this scam can be made illegal. Certainly means exist to do so, but with the financial markets regulated entirely by once and future fund managers for major investment firms with deep pockets and loud lobbyists, no meaningful regulation will ever pass through Congress or the various agencies set up to deal with dishonesties such as the pump-and-dump. And in my opinion, there is little need for such regulation anyway, provided the average investor can become properly educated on exactly what constitutes a good stock buy, how and when to buy stocks, how to hold them, and how and when to sell them. The Motley Fool is an excellent resource for this, and you can teach yourself by reading as much as you can online. Charles Schwab has a comprehensive learning center, as do many investment firms large and small.
What you want to avoid at all costs is any talk of trusting anyone. What is it I always say? Oh, yes: "DON'T BELIEVE A WORD I SAY! Find out for yourself!" If your broker gives you a hot tip, research it. Examine the stock with a microscope, pick apart its price history, its earnings, dividends, capitalization, cash flows, legal issues, everything you can find. Then decide if it fits in with your investment goals.
The point is, stop trusting others blindly. The vast majority of humans out there are just like you, but there are predators hiding among them, just waiting for the naiive sheep to let down their guard. Trust must be earned and constantly validated, and knowledge is the best defense against those who prey on ignorance.
No comments:
Post a Comment