Mental Market Manipulation – Investors Beware!

Every good investor knows that there are two keys to success in the stock market – luck and knowledge. The two are intimately connected – the luck portion comes down to being in the right place at the right time so that you can discover the knowledge. There’s a lot you can do to increase your luck – most of it consists of research, finding great news sources, being part of social networks that share infromation about the stocks or investments you are interested in, and generally just doing the work. There’s truth to the statement that luck is where opportunity meets preparedness. When you do the work, the research, the networking – it increases your odds of being lucky.

So…knowledge often leads to luck and even if it doesn’t lead to that big lucky break – you are more likely to do better in the market if you are an informed investor than if you are not. Although, lately, I’ve noticed some very disturbing patterns that require me to give some words of warning about the knowledge you gather and what you do with that knowledge.

Investors are being mentally manipulated and they don’t even know it. Many of the major news analysts, stock pickers, chartists, and news sources are being used to drive market sentiment up or down so that institutional investors can sell at ridiculous highs and scoop up bargains at incredible lows. I’ve been watching for a while now as articles on Seeking Alpha, CNBC, Investing.com, Motley Fool, Reuters, Zacks, and Business Insider all seem to be lining up with either a very negative story or a very positive story – which is then picked up and echoed by the mainstream media, thousands of twitter accounts, and other social media. The interesting thing is that these narratives usually come before earnings announcements, dividends, or other important news – and – here’s the kicker – the news is usually wrong.

I’m aware that this isn’t a new phenomenon – but the size and scope of it are much broader than previously and there is a new and explosive market dynamic which didn’t used to be an important factor. The new dynamic is the rise of instant phone trading – Robinhood alone has millions of inexperienced investors who don’t act on fundamental or technical details but instead act on their ‘gut’ and make decisions on whims. These investors are easily manipulated to buy and sell themselves out of whatever money they have put in the market. AND – and this is very important – most of the institutional big money is now being controlled by bots, roboadvisors, and algorithms –  these programs are able to execute millions of trades per second.

So, let’s say IBM is about to make a big announcement that earnings were far greater than expected. Insiders want to be able to purchase shares as cheap as possible prior to the announcement. They pay a small army of analysts and financial writers to express negative opinions about IBM in the weeks running up to their earnings announcement. That negative message is then disseminated to the media, the inexperienced investors, and the public. It is amplified by the social media accounts. The gut/whim investors feel the negative force and dump IBM. The robos, algos, and bots then see this trend of IBM dumping – they follow suit. The price tanks – more negative press follows.

A few honest analysts see the negativity and call out the bad news. They generally are ignored. The insiders scoop up shares. The announcement is made. Everyone talks about what a surprise the events were. The price goes up and up.

The market has been mentally manipulated. No laws were broken. Opinions were only presented. Analysts are allowed to be wrong. The narrative changes. Wealth has shifted from the bottom to the top – again.

Do your own research my friends. Learn both technical and fundamental analysis. Look at the financials. Buy into great companies and hold. Don’t believe the hype. Good luck!

 

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