My son has been playing baseball since he was five. He knows the game, its subtleties, and its strategies. Talking to your opponent is part of the game. So is concentration. If your concentration is not what it should be, then yeah, you can get distracted and blow a play at a critical moment. When was the last time you saw a major leaguer blow a throw because a fan was yelling at him?
Know the Game
The pros don’t get rattled. You can’t break their concentration by talking to them, or yelling for that matter. They know what their skills are, and they know how to be as successful as they can. That’s why they are pros.
But as an individual investor, you are, by definition, not a pro. But here’s one thing you need to know: the pros will absolutely try to talk you into making a mistake. Because, at least in the short run, investing isn’t a zero-sum game. One person’s profits are another person’s losses.
Maybe you bought a stock at the wrong time. Maybe you sold at the wrong time. Either way, I’ll bet there were pros telling you that you were right to do what you did each time. It’s not a coincidence: misinformation, exaggeration, and downright bad advice are part of the stock market game…
Sometimes it’s called “talking your book.” Talking your book means your advice or opinion is tailored to match the way your investments are structured — for example, if you bought oil stocks and then you tell people that you like oil stocks, especially the ones you already bought.
Or let’s say you’re short a certain company, and then you start giving presentations at conferences that detail why you think the company is a fraud.
One hedge fund manager I’ve
written about before, Bill Ackman, did this with a company called Herbalife (NYSE: HLF). He gave three-hour presentations detailing how he thought the company was a Ponzi scheme. He petitioned the SEC and the FTC, three congressmen, and even a senator to investigate the company… all because he thought it would make the stock go lower and he would make money.
If you really understand how big investors use the media as a platform, you can be a much more successful investor. And so you know, just because a big investor has the ability to talk his or her book to a wide audience doesn’t mean he or she will be successful. Ackman has lost over $1 billion trying to crush Herbalife.
Who’s Talking Their Book Now?
Earlier this year, when the S&P 500 was tanking 12% on fears that weak oil prices and a collapse in the high-yield bond market would push the U.S. economy into recession, George Soros came out and said that 2016 was going to be 2008 all over again.
Now, to say that it will be 2008 Part II is a pretty bold call. After all, there’s only been one other period where the U.S. economy and banking was actually on the verge of collapse: the Great Depression. The likelihood of that happening again so soon is pretty slim…
So why would Soros predict such a thing? Because he was short the market and wanted to give it a nudge lower.
Why do you think Peter Schiff continues to say that the Fed is killing the dollar and that gold is going to $5,000 an ounce? Could it be because he owns a gold coin business and wouldn’t mind drumming up a little business?
This is how the Wall Street game works. Big-name gurus have no problem at all telling anyone who will listen whatever will help them make money for themselves and their clients. It’s called “free speech,” and it is not illegal. (However, please note that “free speech” only applies to opinions expressed in a public forum, like on television. If an advisor deliberately tells you something that isn’t true in a one-on-one situation, that IS illegal.)
In fact, these campaigns of misinformation are exactly the type of behavior that leads to investment opportunity…
Here’s an Example
Now, here’s an example of how you can take advantage of misinformation. It concerns Disney (NYSE: DIS). Disney reported first-quarter 2016 earnings on February 10. The earnings report was really good. But one analyst from a firm I’d never heard of came out with a negative research report that crushed the stock by as much as $6 a share. The low of that day was $86.25.
What was the analyst worried about? Here’s the excerpt I published
right here inWealth Daily on February 10:
With strong pricing, we believe ESPN profits can remain relatively flat over the next five years but, in the absence of a convincing DTC [direct to consumer] model, declining subs will lead to significant profit contraction at the unit over the following five years.
Now, I had just recently done my due diligence on Disney because I recommended it to my Wealth Advisory subscribers. So I knew that the concern that revenue at Disney’s biggest division (ESPN) would decline significantly was BS. As I wrote in that same article:
The flaw here is obvious: the analyst is assuming that Disney won’t have a direct-to-consumer platform that will allow viewers to buy ESPN a la carte in the next five years. That’s ridiculous.
Right now, Disney is the king of content. The company absolutely will find the best way to monetize that content.
Another big issue for Disney right now is its dividend. The current yield — 1.5% — is too low. I’m surprised Disney didn’t announce a dividend hike last night. But I have no doubt a dividend hike is coming.
I think buying Disney under $90 is a pretty good idea right now.
As it turns out, I wasn’t the only one who had a fully functioning BS detector that day. Disney hit a low of $86.25 that day, but it closed at $88.85. Today it is above $103.
So the next time you hear an analyst or some guru tell you that your shoe’s untied, do a little digging and see how valid the argument really is. There’s a pretty good chance that you can find opportunity this way.
Until next time,
