Conflict of Interest

If you're an online investor doing your own research, you're up against a community that is more corrupt than anything else you will even find in real world. Big Wall street firms will do anything and everything to make a quick profit. Investing in stock market today is very different as compared to what it used to be back in 80s or early 90s. Back then, 5-8% return was great and research firms have more honesty in serving common public interests in addition to their private clients. But it didn't really matter then. There wern't many individual investors back then. If you had money to invest, going to a stock broker or a financial advisor were the only options.

Today things have changed. There are millions of individual investors who believe they can invest in the stock market and earn a decent 6-10% return. They have a firm believe that they have access to all the research and screening tools that Wall Street elites do. But most of individual investors make no money, in fact most of them lose money when they invest themselves. Why does it happen?
To analyse the reasons why most individual investors fail, you'll have to first understand the system they are trying to rely on. If all of us can take responsibilities for our own financial planning and do it well, who would need giant Wall Street firms? Big Wall street firms are in the business of making money by investing it in the stock market and if an individual investor can do a better job, they wouldn't be in the business anymore. So when you decide to invest yourself, you're making a decision to go up against well established players in the market. If game is played fairly, these big boys will lose because of their sizes. Now why does size matter in this game? Well, it matters because size in this game represent the equity(cash). Here is a good example; You can invest $1,000 in a stock and close that position a couple of days later without impacting the price at all because when million of dollars worth of trading happens on a daily basis, $1,000 is insignificant. Now think of $100mil. If you change the amount to $100mil from $1,000, it is going to be difficult and sometime impossible to cover your track and others will know when you enter or exit a position. Since any big firm can't do anything about its size, it resorts to other tools that are not available to individual investors. You read it right - I did really say "Other tools". Big Wall street firms deploy an army of financial analysts, financial journalists, financial publications, TV shows and other online tools such as message boards, financial websites etc.

And here is how it works;

Have you ever bought a stock because it had a good earning report and you felt that it would move up? Most of us have. What happened next? You saw a downgrade from a stock analyst and reason - their "own channel checks on the company and business". Well, if they knew something was not right about the company, they should have just shorted the stock. Why they had to tell the world that something bad was going to happen? It is a simple question, but answer is very complicated.

Even though most people believe that Wall Street research firms are seperate from the firms who actually invest money for their clients, truth is far from it. In fact, there is a very complex relationalship among these players that federal goverment or SEC can't do anything about. Remember WorldCom and Saloman Smith Barney? When everyone in the world was suspecting bad things at WorldCom, Saloman Smith Barney's analysts were upgrading the stock.

Here is another example that is fairly recent. Let's use satellite radio industry. XM satellite and Sirius are the only players and there was a rumor for months that they would merge and in anticipation of this news, their stock prices were going up. If you also believed the hype you probably bought some stock on your own. There is nothing wrong with using a rumor to make money because you probably have heard it before - Buy on rumor and sell on news. Everything looked normal and things were calm. However, in a totally unrelated press conference, a "journalist" asked FCC commissioner about the merger possibility and commissioner replied that it can't happen since this would create a monopoly in the market and FCC would reject such a proposal.

Next morning both companies took 15% hit on their stock prices with heavy volumes. Most people thought that it was obvious that speculators were fleeing these stocks and some small investors who bought their positions on margin had to close out to meet the margin calls. Some sold it in dissapoitment because they heard it from FCC commissioner himself and there was no reason to believe that he way joking? Well, couple of days later FCC commissioner was again asked about the merger possibility by another "journalist" and this time his answer was "We can't comment until we see a proposal and rules can be changed to allow such a merger". What happend here? Didn't the same guy said that he would reject such a proposal 72 hours ago? Of course he did, but it was his opinion and he was entitled to change it. This time both stock took off and gained over 20% in next week. Two months later, a formal merger announcement was made. End result - thousands of innocent investors lost money because some "journalist" was asking some "simple questions". What really happened here was that some big players used this opportunity to shake weak individual investors and took their shares fairly cheap and made pretty good money in just a few days.

This is exactly what big financial firms can do. "Conflict of interest" has no place in
Wall Street business model. It is illegal to do business when you have "conflict of interest" but it is so hard to prove in court. And who has time, resources and money to file court cases for hundreds of violations that happen on a daily basis?

Bottom line - Don't get distracted by the "noise" in the stock market. If you have done your homework and like a stock, you don't need to call into a "TV show" or read a "Stock picking magazine" to make your decision. Also remember, buy and hold doesn't work anymore due to the fact that there are so many palyers who are trying to make a quick buck. So set your rules and stick to them. Cut your losses early and if you make a profit, make sure that you keep some of it.

Happy investing!
-Amplidyne