Stock Market UnderBelly: Part II

Man Holding Up Stock Graph --- Image by ©

A friend of mine, Tom, is a marketing expert. After reading the post published earlier this week (The Stock Market’s Dark Side), he flashed me a thumbs up for telling it like it is in the stock market world. Then he urged me to go further, not only because the subject matter makes for a good story, but …

“because people should know about the promotional side of the stock market, have their eyes wide open, before deciding to become an investor.”

So hats off to Tom for inspiring me to write Part II. To explaining to you why it would be wise to carry healthy skepticism toward corporate press releases, media reported snippets from CEOs, and any other sort of promotion be it splashy, widely circulated headlines, small time investment newsletters, or the ever more popular personal finance blogs (BuddhaMoney included).


Let Me Tell You A Story …

Our society is huge on promotion. Whether it’s selling political drama on the right or left, running shoes, the latest Hollywood flick, toothpaste, tourism, financial products … whatever good or service or viewpoint is out there, it’s being promoted in big and small ways.

That’s all good. I mean, if old-fashioned word of mouth isn’t bringing in as much business or converts as desired, then you turn to other mediums to build awareness, bring in customers, and drive sales. This is simply how our system of commerce works.

The problem, however, arises when we’re not fully aware of the rules of the game, not seeing promotion for what it is, believing, hook, line and proverbial sinker, that the advertisement is completely truthful. When this happens, we’re bound to be disappointed, maybe taken for a ride, because the vast majority of promotion is about story telling. And commercial story telling, by its nature, involves suspending reality, manufacturing illusion, exaggerating a little or a lot here and there for the purpose of drawing more eyeballs, opening more wallets.

Watch Out For Cow Pies

Sticking to the financial world, noise is constant and relentless. Partly because the corporate arena is crowded  and you may have to raise your voice if you want to be heard.

Fair enough. And partly because the folks running banks, corporations, mutual funds, index funds, whatever financial product or service provider is out there, know full well how to play the human propensity toward fear and greed.

They know that, for too many folks, dangling fear and/or greed under the nose sells. And this isn’t cool, fair, or kosher.

Because it’s not a level playing field. Because financial service providers have vastly more information than Jane or Joe Consumer, and not sharing that information is detrimental to J or J Consumer. And when this happens, financial service providers are acting purely out of self-interest (i.e., with intent to gain more business) having little or no regard to potential harm done to honest folks handing over their hard earned money. And that … well … that’s just not the sharing, caring world that we want for our kids, or our self.


Alright then, since it’s not a level playing field, since we don’t have access to certain relevant information, and are sometimes fed misleading information, what do you do?

You block out the noise and cut through stinky cow pies. Here’s a few pies I stepped around this morning while scanning through financial websites:

  • Sell These Stocks Before Market Closes!
  • Runaway Stock Baffles Analysts!
  • How One Man Turned $50,000 Into $5 Million!
  • Biotech Stock Explodes After Drug Announcement!
  • This Is Not An Investment Opportunity You Want To Miss!

Now, you may read these headlines, all of which are taken from small publications with important sounding names, find them mildly amusing and not give them another thought. But some folks don’t. Some folks click on the link, then get sold on shady content that feeds their investment decisions.

Unfortunate? Yes. Because here’s the thing: no legitimate, worth your time publication is going to run headlines like that, the purpose of which is none other than to draw you in. And once you’re in, that’s when the real selling starts. And if persuaded to buy (sigh), you’ll likely lose money.


All Dressed Up

Major media players, multi-billion dollar companies, aren’t all that different from the small fish. In fact, because big media and big corporate have much deeper pockets, their promotions may be a less obvious sell, slicker, and more persuasive to a wider audience.

Take Nike, (NYSE:NKE) for example (I could have used any large corporation-not picking on Nike here). Are their shoes really better than Adidas or Reebok or any other shoe manufacturer? Because Michael Jordan is paid a gazillion dollars to promote Nike shoes, and you went out and bought Nike shoes, will you become a better basketball player, will you become like Mike, or just feel more cool? (I own Nike shoes because they’re comfortable and I can buy them on sale at discount outlets).

Aside from product quality workmanship, Nike isn’t selling guarantees. Plain and simple, Nike sells its shoes in the best way it knows how: by placing a storyline in your head. And we, the consumer, read into the ad whatever we want. And once we own the product, we feel whatever we want to feel, we perpetuate whatever illusions we like.

Financial companies are no different. Let’s use Blackrock Inc. (NYSE:BLK) as an example. The largest asset manager in the world, and provider of index funds and mutual funds, says this on its homepage:

“A suite of 18 low cost funds that can help make your long-term investment goals a reality.”

Yes, the funds could do that. And they could just as well blow up in your face. But Blackrock doesn’t mention this. However, in keeping it legal, Blackrock does state, in teeny, tiny print at the bottom of the page,

“The funds are not guaranteed, their values change frequently and past performance may not be repeated.”

Okay, good for them, check off the box next to full disclosure. But, really, how many people are reading teeny, tiny print? Even if you do read it, is the message really sinking in? I mean, it’s boring legalese with no emotional resonance.

Fact is, most of us focus on the stuff that gets our juices flowing, that makes us dream of rich, comfortable retirement years. And the ideal placement for emotional triggers is the top page. This is where Blackrock seems to promise to make my investment goals a reality. Shouldn’t I believe what they say? In short, nope. Trusting in any sort of promotional literature would not be wise, especially a promotional hook that is completely undermined by the teeny tiny legal print.


Keeping It Honest

By healthy skepticism, I mean ask questions. Ask what is the motivation of a company to issue this or that press release, to have their CEO run the talk show circuit, or invite media to corporate sponsored events.

Know that certain major publications lean politically left or right (the center seemingly in hibernation) and this will influence both what information they present and the way in which they present information.

Know that stock analysts, those people who like to make you think they have a crystal ball when it comes to stock forecasting, are in the sales game too. Sure, they have access to company and economy specific information that we don’t, but their predictions remain simply that, predictions.

Know also that stock analysts almost always issue BUY or HOLD recommendations. SELL recommendations are exceedingly rare. Why? Do all stocks go up, indefinitely? Do all companies succeed?

The only reason SELLS are rarely issued is because analysts are engaged in their own form of stock promotion. And the last thing a stock analyst wants is to influence stock markets to move lower.

There’s a ton of promotional noise out there. The sooner you’re able to recognize noise for what it’s worth, the better informed you will be, the wiser decisions you will make.

ps. big thanks to Tom for the inspiration and a bit of promo in support