This column was originally published on RealMoney on Sept. 23 at 12:47 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.Often investors, both professional and amateur, will run across what seems like a great investment idea in the media and run to act on it. My advice is simple: Wait. For months, perhaps. I'll lay out my approach to media touts, as well as a list of current stock tips, later on. But first, let's see how the market reacts to them. Say that the idea is to go long on a stock. At the market open after the story appears, a rush of orders will push the stock's price higher. Then, as the day progresses, the stock will drop and end the day lower than at the open, but usually higher than the prior close. For the first few days, the market responds to the supply/demand imbalance, and then the merits of the investment become clear. As Benjamin Graham observed, in the short run, the market is a voting machine; in the long run, it's a weighing machine. My experience has been that after the initial supply/demand imbalance period, the performance of media-touted investments are marketlike on average, leaving the early buyers with assets that generally underperform. The degree of underperformance varies with the size and character of the audience that saw the story. In general, the larger the audience, the larger the reaction. The reaction also tends to be larger the lower the experience level of the audience (as long as there is some investment experience -- people with no experience won't do anything). Novice investors are the ones that jump at ideas that seem to be hot when under the media spotlight. Experienced investors tend to have their own idea-generation processes; they either ignore the idea or throw it into their process for later review. Naturally, the bigger the media play, the bigger the splash. A front-page article makes waves; a tidbit mentioned in passing should have no impact, even though it might be powerful information in the hands of an informed investor. The impact is also greater depending on the fame, or perceived skill, of the source. The potential size of the investment is negatively related to the degree of underperformance. A positive article on General Electric will have less impact on the price of GE than a similarly positive article on a smaller company. Naive investors place their market buy orders without thinking through the degree of liquidity of the investment.
Know Your EnemiesA number of media sources are particularly given to sensationalism, such as newsletters, online message boards, radio and sometimes television. The risk is particularly great when the "expert" speaking has an ill-defined financial interest in the idea under discussion. The higher the level of emotion employed, the lower the level of humility, and the less the focus on what could go wrong, the more you should be skeptical. The adviser can sometimes be an enemy of wealth creation. There are other enemies as well: sophisticated traders who watch for unusual trading activity off of media play and take a short-term contrary position. They short into bullish news and buy bearish news when they perceive that the money acting quickly on it is naive.
What to DoMy advice is simple: Wait. Invest in a subset of the ideas that still have value and have not fully reacted to the information after a period of time. Also, compare new ideas as a group vs. each other and against the existing assets in your portfolio. Only add a new idea if you think it will beat the median idea in your portfolio. I have detailed these ideas in a piece titled "
|Decision/Reaction Grid||Merit of the idea still good?||Merit of the idea bad?|
|Results have already occurred.||Can't kiss them all.||Glad I missed that bad boy.|
|Results have not occurred yet.||Invest.||Don t invest.|
Lest This Be Purely TheoreticalI maintain a "B list" of securities that might be interesting investments but don't meet my criteria at present. Here's a list of securities I don't own that are cheaper than the median cheapness estimate of my portfolio. Have a look; maybe you'll find one that interests you.
|Potential Investments |
|Symbol||Name||Short Ratio||Yield||Mkt Cap||P/E (next yr)||P/B||P/S||Range|
|BAC||BANK OF AMERICA||3.8||4.38||169.5B||9.54||1.69||3.18||7%|
|CTB||COOPER TIRE & RUBBER||27.9||2.67||967.6M||16.94||0.99||0.46||6%|
|EDP||ENERGIAS DE PORTUGAL||8.6||4.25||10.352B||12.67||N/A||0.99||55%|
|FMP||FELDMAN MALL PROP||N/A||1.92||173.4M||9.09||1.61||6.56||71%|
|TMX||TELEFONOS DE MEXICO||7.4||3.29||22.700B||9.3||2.45||1.58||86%|
|Source: David Merkel and Yahoo! Finance |
Range Statistic is zero at the 52-week low, and 100% at the 52-week high
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