Saturday, June 23, 2007

Tips, Rumours and Hearsay

Somehow, during a bull market, people have the amazing tendency to throw all caution to the wind and pump in ever-increasing amounts of money into equities. Most of this is due to misplaced over-confidence and a general feeling of euphoria. The title is apt in that bull markets generally involve all sorts of "stories" of companies doing this and that, and people seize on any little bit of news to pile into a counter and push it sky-high. In essence, these are the characteristics of a raging bull market !

Tips are so-called hand-me-downs by individuals who think they know more than they do, to people who wish to know more than they should ! Call it the blind leading the blind, but most of the time the provider of these tips himself got the tip from someone else, and so on. It's sort of like a chain email; no one knows where or how it originated but it is propagated anyway and somehow manages to spread like wildfire. Tips would include the next big thing (like alternative fuels, casinos, construction) to company-specific events like mergers/acquisitions and the like. The reason why people love tips is due to human psychology. We can't resist knowing something that someone else does not, and it gives us an inflated ego and a feeling of superiority that we have "beaten the crowd". In actuality, most tips are like hot vapour - they dissipate without leaving much trace.

Rumours are somehow even more insidious than tips, as most tips have some form of basis (however nebulous) to back them up. Rumours swirl in dark, dank drains and rise up like phantoms to conquer greedy and weak minds, forcing people to believe incredible things and react in unsettling ways. I have heard rumours of shares soaring to high heavens and impossible company turn-arounds. Such rumours are usually (90% of the time) unfounded and those who chase up their pipe dream may end up much poorer. The problem with rumours and tips is that it gets infectious if one initially makes money; this causes them to listen out (to their so-called "reliable source") for more tips in order to generate more money. Thus, the hole gets deeper and deeper and the poor person simply sinks in more and more into the quicksand.

Rampant speculation and impossible valuations characterise the current market, and to me personally, this is worrying and a major cause for concern. Looking at a market volume of 3 billion shares valued at around 1.5 billion dollars simply means that on average, people are churning shares worth $0.50 ! I've seen cases where historical PER has reached 1,200, yet people are still calling "buy" and stating higher target prices. Most of the pennies are in play and even the BT calls it "rotational plays", meaning stories float from one industry/company to another to trigger either panic buying or panic selling.

Whatever the case, one thing's for sure. The market now is more emotion-driven than I have ever seen, and this is also reflected in the forums I have been browsing through. More and more people comment on how easy it is to make money, boast about their supernormal gains and pat each other on the back for profiting on a hot tip. It's herd mentality and is a perfect example of "the madness of crowds" (see my previous post on this).

In such markets, value investors do the best thing they can do in such circumstances. They wait. If the market does not produce prices which are below intrinsic value, value investors will wait patiently till the right opportunity comes along. Fervent activity is not akin to intelligence if you do not know what you are doing, and taking a slothful approach may actually be better in such a rising market.

I did ask a friend recently who gave me a hot tip about Unionmet. When asked where the tip came from, she was unable to say except that her broker had recommended it. When further quizzed if Unionmet was a good buy based on objective research, she concluded that no research or reading had even been done. This practise is common but becomes more and more frequent as the market climbs higher and higher. Those who don't want to miss the rally quickly take fresh positions, not knowing that with each successive price rise, they are only increasing their risk and their potential losses; while limiting their gains.

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