Looks like the nerve runs deep on the
small-cap promotion front. People want to know what is the commonsense, nongovernmental way to regulate the small-cap promotion game without shutting it down. People don't want money managers to stick only with
. That's stupid, I agree. I know I don't want that. I want people to talk about stocks they like, no matter what. I want
to be able to discuss his faves on our site and I want Greg Hymowitz to talk about his faves on
. However, I think it's up to the people running the promotion venue to be sure that people are protected from the rush to buy a stock that can't handle the excitement and the influx of buyers.
Join the discussion on
So let's set up the debate. Here are my suggestions about how to handle this situation better, and handle it before the government gets involved. It probably will. It probably is already.
First, we all have to recognize that the problem of Bonnie H could have been avoided by a simple limit order. She would have missed the stock. But that would have been right. When you use a market order you are simply fodder for the daytraders who prey on these situations. Daytraders know they can get stock faster and sell it right into retail buyers' market orders. That's the way the game is played. For better or worse. At least with a limit order you're not hung from the get-go.
Second, we have to have either the manager or the host of the venue (an editor or a television anchor) recognize the power of the medium and recommend that people wait until a stock cools off to buy. And that's still another good moment to mention that market orders shouldn't be used.
Third, we have to accept some caveat emptor. If you buy a small-cap stock up 4 with a limit order, that's pretty stupid. We can't protect against stupidity. Again, a simple "don't chase" from a manager could really help things.
If we issue small-cap warnings, Miranda style, we'll prevent much of the wrongdoing.
Finally, we have to recognize that the power of certain media is so great that you'd have to be living in hibernation not to know about it. So there can no longer be any "good intentions" alibi.
Of course, the difficulty will come in defining what exactly constitutes a small-cap. We have billion-dollar stocks these days with small floats that might as well be called small-cap. (Personally, I think the better definition would be "early-stage" or "unseasoned" companies.) Again, common sense tells us what could be moved, not the actual size (shares outstanding times dollar price).
We'll have to worry about venues, too. Five years ago this week, when I moved a series of small-cap stocks with an article in
, the people at
The Wall Street Journal
didn't even believe that the magazine or I had that kind of power. I wanted to put an article in the
stating that the magazine had moved them and that I had urged people not to buy them up after that move. But they thought something fundamental had moved the stocks. That turned out to be very naive.
We scrambled to find one other instance of the magazine having moved stocks, but we couldn't find one. I thought it was a defense that we didn't know that we had that power, but the lawyers on all sides informed me that we should always presume that such a bump could happen. That's one reason that this site takes special care when dealing with smaller stocks. And talking with the editors at
, I understand that they are making moves to become more vigilant about the smaller stocks issue. Historically,
has steered clear of the smaller stocks, but sometimes these stocks are part of the debate. In those cases, the editors at
, like anywhere else, have a responsibility to make sure readers are fully informed about the risks of those stocks.
Again, we can't shut down the discourse. But that's what I'm afraid
happen if we don't deal with it ahead of the government. If we just use the rules outlined here, the problem will go away and the discourse will remain free.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Cisco and Sun Microsystems. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at