Wednesday, May 9, 2012

Using the Media as Your Investment Adviser

The only worst investment counselor than the IRS is the mainstream media.  If you take investment advice from idiots like the shouting guy, you have no one but yourself to blame, when it all melts down.

They are at it again, the mainstream media, going all ga-ga over the Facebook IPO.  They are gushing like a sophomore cheerleader does, over the football team captain.   "Oh, Mr. Zuckerstein!  Can we give you all our money?  Please?"

What the mainstream media fails to report, however, is that this stinker of an IPO is over-valued, in my estimation by a factor of five.

As I noted in earlier postings, IPOs in general were created for one thing and one thing only  - to allow insiders to cash out, usually on a stock they know is going nowhere.  And history bears this out - even recent history - where Groupon and Zipcar IPOs have turned out to be, well, less than what people thought.

But still, the huddled masses yearning to be Millionaires, all want to "get in" on these deals, convinced that they are "missing out" on the "next big thing."  It is the Casino Mentality at work in the marketplace.   Stocks are not sold as rational investments, but rather as speculative gambles.

But historically, most of these "next big things" have gone bankrupt, or were not the great investments that people thought they were.  When you pay top dollar for a stock, only to see it drop to 1/5th its initial value - and stay there for years, this is not an "investment" but just a rip-off.

But beyond IPOs, the media hypes the snot out of different companies and different stocks, all the time.  And in most cases, these stocks go up in value, simply because viewers buy them.   This, in turn, is used to "validate" their predictions.   But once the initial hoopla is over - and the stock price peaks - the people who really know what the stock is worth will sell out, and leave you holding the bag.

Of course, this sort of pump-and-dump is ripe for fraud.   And people have been arrested for setting up websites or spam mailings that hype penny stocks to ignorant investors, who raise the prices dramatically, while the guy who started it all sells out.   And it is hard to say whether these mainstream media sites are doing this or not - we may never know. 

But beyond the possibility of outright fraud, you have to ask yourself the most obvious question:  If the shouting guy really knew which stocks were best, why wouldn't he just buy them himself and shut up about it?   Like any other get-rich-quick scheme, no one bothers to ask this question.   If there really was a "money system" no one would be so stupid as to tell people about it!

But here we go again, and it is like watching a friend drive their car off a cliff.    This Facebook IPO will go off as scheduled, and the great unwashed masses will buy the stock - available on e*trade - for twice the IPO price - making millionaires and billionaires out of the insiders, but eventually bankrupting a lot of the little people.

And perhaps, this could presage a market-wide meltdown, another dot-com bubble, like we had a few years back.   Any why is this?  Because the media hypes these stocks, and the average schmuck buys them.

Of course, even a downturn presents opportunities.   If you could time the market, you could sell all your stocks before such a meltdown, and then, at the nadir, buy them all back for a fraction of the cost.

The problem is, timing the market is nearly impossible to do, without an operable time-machine.   While I firmly believe that Facebook will be a crappy stock for a long time, I am not sure whether this will just affect the idiots who buy it (at peak price, like the gold bugs) or whether it will take out the entire tech sector, as our last bubble did.

And after bubbles collapse, the sound investments recover quickly - as they did from the market drop of February 2009.   If a company is making money and paying dividends, people quickly realize it has value, and that panic selling was a bad idea.

Fear and Greed, those old bugaboos.   People will buy Facebook based on greed - and a fear of being "left out" of a "good deal".   And when the stock crashes, it is fear that will drive people to sell off other stocks in this sector - even for companies that are making money and are rationally priced.

But it is clear we are in for a correction with regard to many of these IPO stocks.  Groupon looks poised to implode, and ZipCar, while mildly profitable, is still horrifically overpriced.  The Facebook debacle will no doubt either takes these entities out, or severely reduce their stock prices.   The result could have an avalanche effect on our overall fragile economy, as stock losses would spook investors, and reduce consumer confidence.

Thank you very much, Mr. Zuckerstein!