Ignore Everybody – Part 2 – Message Boards/Twitter/Emails etc $$

In this section of ignore everybody I will explore some of the other frequently touted sources of penny stock information and how they all approach borderline worthlessness as well.

Message boards:

Stock message boards are all over the internet, the biggest most frequently posted to board would probably be Yahoo Finance. But there are literally thousands and thousands of boards and forums across the internet. While like stock chat you will be occasionally able to extract some useful and tradable info, the potential for finding these diamonds in the rough is borderline impossible.

So why are there so many boards out there? And why do so many people post to them on a regular basis? In my opinion the greatest majority of posts are created by unsure traders looking to reinforce their confirmation bias.

Confirmation bias (also called confirmatory bias or myside bias) is a tendency for people to favor information that confirms their preconceptions or hypotheses regardless of whether the information is true”

So many stock traders particularly penny stock traders, get themselves into the worst and most idiotic trading positions imaginable. Then after rushing into a hot tip they receive from their brother, uncle, or local oil change technician, they soon find themselves under water. What is the next step for this trader? Research of course, while an experienced and profitable trader would know to do this due diligence beforehand, that is hard and time consuming! Penny stock traders prefer the easy way out. And frequently they find message boards the easiest way to find information on their particular ticker. Its much easier to read one sentence posts like “This stock is going to explode”, or “Big contract coming”. Then it is to really dig and research SEC filings, or financial reports, or in my mind one of the strongest ways to evaluate a penny stock, hard and in depth technical analysis.

I’m not sure why but stock message boards are notorious for attempts by traders to create self fulfilling prophecies. While most people would refer to it as “pumping” its pretty difficult for any poster to really make a stock do anything based on message boards posts. Of course there have been examples of this working in isolated circumstances, particularly Jonathan Lebed. But message board posters seem to think that by posting and reposting the same links to 2 year old press releases, or posting rumors and conjecture they can somehow make a bad company turn itself around. Do not do this, do not believe ANYTHING in a message board unless a link is made to a credible news source. Then FOLLOW the link and read the article, do not take the posters opinion or believe he has any idea of what is contained in the linked article.

So should the penny stock trader completely ignore message boards? I reply with a resounding NO! But much like what was detailed in the previous section on stock chat, all postings need to be taken with an enormous grain of salt.

How do I recommend message boards should be utilized? With a contrarian sense of analysis of course! This will be far from the first time that I will mention doing the exact opposite of the herd. Being a contrarian can be effective in all sorts of business ventures and particularly stock trading. But nowhere is contrarianism so powerful as in the realm of penny stocks. Remember penny stock land is populated by three tribes.

The largest is idiots. This tribe makes up roughly 75% of the population. They are by far the largest and most vocal segment of the population. Hence the reason for a heavy dose of contrarianism. I don’t care what venture you are pursuing, if 75% of the segment is driven and populated by idiots, it is a pretty sound strategy to do the opposite. Penny stock traders and lemmings are so similar it is scary.

The second largest portion of the penny stock population is crooks and promoters. While promoters are not always criminals they are close enough to batched together in my book. Yeah there are Level 1 prisons and Level 5 prisons, but they are all still criminals, I see no reason to try and rate their stinkyness for the purpose of this analogy. These bastards make up roughly 20% of the population. The biggest dilemma is trying to spot and locate them. It is near impossible, much like a organized crime syndicate they are very effective at disguising their activities. Although tough to substantiate there is indeed an effective model for tracking them. Just assume that any and all promoters and marketers of penny stocks are shady characters. Sorry to the one out of a million “honest” stock promoters and marketers out there. But if it walks like a duck and talks like a duck, its probably a duck. If you pump penny stocks and send emails and faxes about the latest and greatest 50 cent stock, you are probably already a criminal or about 2 months away from becoming one.

So who makes up the last 5% of the population? And where do I fit in, and where do I hope the reader of this ends up fitting in? The camp that knows penny stocks are corrupt and knows they will never be cleaned up and has decided to profit on that fact! While there are hundreds of trading systems and educational product sellers who will tell you great profits can be reached from buying penny stocks. I have no firm belief in that strategy working out over time. Plus it is simply too hard. Why not profit based on going against 95% of the market who is either foolish or corrupt? I just realized worded that way it almost sounds noble to short promoted and over hyped penny stocks perhaps it is, and this point will be discussed in a later chapter!

So in my mind the best way to work against the heard is to proactively ignore and do the exact opposite of the majority of posts in message boards. If 99 out of 100 posts in a forum recommend buying a stock that has gone from $1 to $4 in a couple days, short it! Will this work all the time, not at all. Will it work more often then not, yes. Of course I have greatly over simplified the process for the sake of this post, but at times it really can be that easy.

I have more or less reached the point I wanted to get across in this section and just realized I did forget to mention twitter. Although all of the above also applies to twitter I would like to point a few things out about twitter being more or less message boards 2.0

You will quite frequently hear that twitter is this great social tool for penny stocks and how the information is “purer” and more real somehow since it is created by real traders and real people. It is entirely baffling to me how anyone could make this argument? Does twitter somehow stop promoters from creating accounts? Can a promoter or pumper not create a bunch of random accounts and post under them? Yes, unlike message boards there is MUCH less anonymity on twitter, since anyone can look at your history of tweets and followers etc. But again most part time traders are not willing to do that due diligence and crooks will always adapt to the latest system, thats why they are crooks!

But here is the ultimate crux of twitter, even if the posters have 100% pure attention, remember the greatest segment of the penny stock population is IDIOTS! Whether or not they mean well, has no bearing on whether you should listen to them. Most have done ZERO research or what DD they have done is borderline worthless and much like the message board posters they are just trying to defend the terrible positions they have gotten themselves into.

In the next section I will detail how to digest the main stream media and whether it is effective to “trade the news”.

6 thoughts on “Ignore Everybody – Part 2 – Message Boards/Twitter/Emails etc $$”

  1. I just ignore message boards and Twitter (except the Twitter of a couple good traders I know) … although they can both be fun for taunting idiots.

    Confirmation bias is one of the biggest problems for traders. It, combined with the endowment effect, make it very hard for traders to take losses.

  2. All I can say about this article is that you are 100% spot on and it’s funny how some people just do not get what happens in penny stock land, cause it is truly a simple process. The crooks sell to the believers, cause god damn there is always someone stupid enough to believe. I would also compare it to something else but it being sunday and all i’ll not open that can of worms. great post. thanks.

  3. Thanks for the input guys!!

    At this point what are your thoughts on this project? Think I could turn a bunch of these posts into a decent penny stocking ebook for beginners?

    Probably sell it for $20-30?

  4. Thanks for this post. As a comment, I would also add that it is helpful to understand the cost of quality research. When I used to trade stocks, I used message boards to find the various topics that (I thought) should require my attention. For example, I would be interested in XYZ and through message boards I would “deduce” that the following two issues were the critical pieces of information affecting the stock price:

    1. Into what will management invest the balance sheet cash?
    2. Will the company be awarded its patent?

    In addition to feeding readers specific topics, the message boards also gave me links, documents, websites, and various arguments around these topics. This is all fine and good, but the problem emerges because the message boards were so easy to use, and the ease of research would lull me into stopping once I had determined my opinion about those few topics. So, for example, I would do my own due diligence and determine:

    1. Management has a long history of share buybacks and will likely buy back its own company stock (positive).
    2. There is no similar patent registered or under application, so the company will likely be awarded the patent (positive).

    Then, on the basis of my “hard work,” I would buy the stock and await my reward.

    The problem, of course, is that the critical issue for the company may be #3, #4, or #17. The message boards only focus on certain issues (such as #1-2), provide little real evidence about even those topics, and delude readers into thinking that the issues presented are actually critical, when in fact they may be inconsequential.

    I now do not trade stocks and, instead, work for an equity research firm. I now know the thousand-dollar, million-dollar (and a few billion-dollar) clientele who actually pay for quality research, and I now understand what it means to do “due diligence.” I also can see from working on my reports that even the exhaustive work that goes into our (and similar) research is oftentimes inadequate. With a fleet of researchers flying around the country and staff spending weeks on the telephone, there are still times when our reports turn out to be overwhelmingly inconclusive. After knowing what I know now, I am hesitant to believe that I can know enough about *any* company enough to trade its stock. At the very least, even the most basic companies require weeks of research to deeply understand.

    If your readers use message boards to conduct due diligence and go no further than the topics presented, they are definitely remiss. Thanks again for your post!

  5. First time commentor Timothy, and I must say great post. I talk about much of this in my e-book. I would also include chat rooms, and dare I say it, blogs.

    Yesterday when the market went crazy, up 3%, many StockTwit fools came out of the woodwork. One said “if you didn’t big today then you need trading lessons”. I lost $900 on the day so I didn’t appreciate it much – but being short biased didn’t help me. Remembering that I never hear these people tweet like that when the market is down 3% made me feel better.

  6. Hello Tim. Great job on your blog I love it. Keep on the good job.

    Regarding your chapter on “Don’t listen to anyone”. I remember reading “One up on Wall Street” from Peter Lynch. Somewhere in there he says that he uses general opinion to gauge the state of the market. When you are in a state that even the taxi driver is trying to give you some stock tips. Then he knows it’s time to sell. The market is way over valued and the bubble is about to burst. On the other side of the spectrum, when people ask him what he does for a living, and he answer that he is a professional investor. If people flee him like he has the worst transmissible disease and look at him from head to toe with a total face of disgust. Then he knows that the market is way under valued and its time to buy.

    Food for thoughts for the contrarians.

    Regards.

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