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Beware the Wall Street Hype



Rule 23

Amateurs and professionals alike simply don't have enough respect for the Wall Street promotion machine.

They don't realize that balls can stay in the air much longer than they should. They don't understand that analysts and firms get behind stocks — sometimes irrationally, sometimes greedily — and they can keep the stocks propelled in an up direction well beyond reason. That's why I say,


Never underestimate the Wall Street promotion machine.


Consider American International Group (AIG - news) and Fannie Mae (FNM - news). Here are two companies with extensive banking opportunities dangling from one side and good track records hanging from the other. These had been two lovey blankets for the sell side for so long that they wouldn't give them up. Both stocks stayed up far too long, even in the post-Spitzer era, because the analysts viewed it as their job to keep the stocks up.

Now, I don't mind admitting that things are better now than they used to be. When I owned Cabela's (CAB - news) right after it came public, the analysts who brought it public bent over backward not to recommend the stock, to the point that I missed the promotion machine.

Analysts now have some degree of conscience and are able to separate themselves from being flunkies for banking. But that doesn't mean they won't fall in love with some stocks and do everything they can to praise them long after they shouldn't. It tends to happen particularly to winners, stocks like the online education companies or the biotechs or some of the doggier software companies. The hope never ends. The hype never ends. Not until the cracks are so obvious that it is too late to get out.

In particular, when you short a stock remember that an analyst will twist any data point into a positive to get a stock juiced. Again, that's his job. Don't think badly of him; just be ready to reload when he does it.