22 December 2017

The Jungle of Online Finance Chat Rooms

Not everyone who gives you bad advice is your enemy, and not everyone who gives you good advice is your friend. 


Internet stock chat rooms have added an entirely new dimension to investing in stocks over the past 10 years. Meanwhile, small-cap investments have attracted disproportionately more attention because of the disproportionately higher percentage returns they potentially offer investors.

If a small-cap stock rises from $0.05 to $0.50, it means it has risen from 5 cents to 50 cents. That’s an eye-watering 900% profit. No blue-chip stock could ever hope of generating a return on your investment of that magnitude, quicker than an embryonic small-cap stock with wings flapping, gaining altitude with a whiff of sales revenues and ambitious expansion plans already on the horizon.

That word ‘potential’ is probably the most used word in small-cap investment chat-rooms, stock-market announcements and investor discussion groups. Small-cap investing is all about turning potential into actual market traction.



Here comes the cavalry

It would seem that alongside the indomitable growth of internet connectivity, there has been a proportional growth of online users with stark resemblances to real-life market participants, including all their shortcomings.

Just like when you’re at the pub — there are lots of voices you like the sound of, and you could agree with a lot being said. But by the same token, the same pub has fraudsters, liars, loiterers, wind-up artists, plenty of slurred speech littered with grammatical mistakes, and even the odd oddball. There’s also an investor or two floating around.

Since the dotcom bust in 2001, we've seen possibly the greatest bull market of all time, and it has coincided with incredible rates of Internet connectivity, and importantly, a far-flung assimilation of digital communication into everyday life — possibly the greatest communications revolution of all time.

These two factors have made investment chat rooms and bulletin boards incredibly popular, incredibly easy to access, and therefore, helter-skelter at times due to the inherent anonymity. 

Sometimes dubbed "Desktop Warriors", or "Keyboard Jockeys", one of their most abhorred monikers is “Troll”.

Savoury and Unsavoury

Within the realms of the Internet, investment chat rooms take up a rather niche segment dwelled by both unsavoury characters you should avoid, and helpful ones that provide good insights, as well as a few laughs. 

After reading this detailed character profile of Internet Trolls, you’ll be ready for any slime these characters spew and you’ll know exactly what you’re walking into if you decide to tangle with them online.

Internet Troll Profile

  • Usually male
  • Spends long periods of time online with an existing addiction to Bloomberg News and/or CNBC Europe
  • Highly motivated by money but struggles to enter commercial premises to make purchases or seek advice regarding a potential purchase due to social anxiety
  • Intends to obtain, tamper with, exchange and deliver harmful information to adversely affect the price of a stock, or the sentiment underpinning a stock.
  • A general understanding of digital tools, the Internet, and its capabilities. Comfortable with employing tools such as VPN servers, multiple email accounts and even entire websites to conceal his activities and avoid detection.
  • Psycho-pathological in experiencing power and control online fuelled by their unappealing offline-reality of being insignificant, angry, alone and in need of short-term cash flow.
  • The magnitude of psychological abuse they inflict upon their online targets is directly correlated to their probability of suffering from acne, childhood-trauma-repression, denial or poverty.
  • When online, they exhibit a lack of empathy, have minimal capacity to experience shame or guilt, behaves with callousness and a grandiose sense of self.
  • All opinions and statements are highly distorted and skewed towards ever-increasing stock prices, with a particular focus on the stocks currently held in their portfolio. 
  • Developmentally immature with many stuck in permanent states of arrested development.

The Investment Generation


Investing needn’t be an exclusively boring exercise full of charts and stats — it is also done through connections with other people, discussions, real-world research, visiting AGM’s and learning new fields of expertise.


Therefore, chat rooms provide a potentially superb investor experience full of knowledge and learning, or, a garish struggle that leaves you with a sour taste in your wallet. The most important word to then introduce is Speculation.

Speculation is the root of most chat room discussions


There’s nothing wrong with hype and a bit of market speculation, as long as you’re aware of the stakes and you have a salt-shaker handy for a quick pinch during the trading day. Also handy, is a common-sense approach that is based on logic, rather than emotion.

These days, common sense isn’t so common — and it has everything to do with people struggling to control their emotions.

Rule number one when it comes to internet chat-rooms of any kind whatsoever: Don’t believe everything you see or hear or feel. It will be tempting, but you must remember to look for alternative sources before letting your emotions whisk you away into doing something you regret.

Types of Posters


To give you a head start on spotting chat-room hooligans, engaging them and taming the effect of their shenanigans, take a look at our list of archetypes that frequent any and all investment chat rooms out there.

If you learn to identify them quickly, you will be able to see through their superficial agendas with newly-acquired clarity.

After a bit of practice and seeing things for yourself, you’ll be spotting these toerags from a mile away, and even having a laugh at their expense instead of them having a laugh at yours.

The Lurker 

Lurkers will not contribute any information to an internet stock forum, but rather observe the activities of all other users and their posts. This is generally the recommended behaviour for newbie chat-room users, and when attempting to gain information from internet chat rooms in general. However, some users take lurking to the extreme.

Lurkers are by far the most common type of chat room participant, and can often present very insightful information about stocks or other chat-room users, given the considerable time they’ve spent online.

One thing of importance to bear in mind when encountering lurkers is whether their loitering is being done with intent or not. If without, they are probably harmless. If with, they will likely be metamorphosing into a different chat-room-user-classification, in the foreseeable future.

The Mysterious Insider


This poster will drop hints that he/she has insider knowledge which can influence a lot of readers — especially in an accurate information vacuum or market rumour-mill overdrive mode.

Conveying their message is usually done using implication, or providing information in a form that will encourage the reader to infer a message that could be construed as inside information if only the poster was allowed to spell it out directly. 

Expect bundles of hyper-optimistic price predictions from this poster — and very little substance in terms of forward price-action accuracy. If anything, this type of poster could sometimes be used as ‘reverse indicator’ which in other words means, do the opposite to everything they say.

Example:

Mysterious Insider: “You gotta hear this guys; I’ve just got off the phone with one of my old college buddies, we studied Geology together.

"His specialisation is in sedimentary rock, and, graphite. He’s dead-set sure that this mineral will be mined heavily, and sold expensively. He says the future is made of graphite and that as an investor, I should start scouring the market for decent graphite stocks...

...I’ve been investing in stocks for 20 years and so I know what to look for in small-cap companies. I have also worked on a few deals, back in the day, so my nose is that of a bloodhound when it comes to knowing who’s who and what’s what in Resources.

At my previous multibillion-dollar hedge-fund, I was the Gordon Gekko of my row of office cubicles, and you could always rely on me to be shorter than grass and quieter than water when it comes to getting my leg over a deal.

According to my eagle-eye and a few other little birdies, I’m sure ABC Corp is going to get its act together and declare a Resource in the coming weeks. I was out with their CEO Adam N. Eveitnot for drinks just the other week, and boy does a tipsy CEO like to talk business and give tips.”


DO NOT listen to Mysterious Insiders.



Market Desperado

This poster has clearly invested too much money with no research and is usually the last one to come to the party.

They will desperately beg for information from the perceived insiders, often resorting to tactics like setting a deadline when they have to sell (impromptu last-minute wedding, credit-card bill or kids college fund) to try and gain information. 

If this user-type has somehow found out about, and invested in your stock, it is a pretty good indication that the level of hype is too high around your stock. It may be time to consider re-evaluating.

The good news is that Market Desperados are largely benign and are merely seeking validation for their own silly actions. However, the piffle from Market Desperadoes can rapidly become malignant if it transforms into pushy encouragements to buy into his ailing stock (to help with the share price presumably).

Statements or declarations uttered by such posters usually use two psychological methods — either conjuring a fear inside you, or appealing to the profit-seeking entrepreneur in you.


Example:

Market Desperado: “Guys and girls, if you don’t get on the back of this stock, you’ll regret it forever and worse still, you won’t be able to buy that brand new car you’ve always wanted. So what if the stock is at rock-bottom, trading at 1 cent, and has more than a billion shares floating around out there — it can’t go any lower, so if you don’t get in now, you’ll kick yourself for not seeing the mathematics of it”.


The Dumb Attack Dog

This poster will aggressively defend their stock to the hilt by attacking and aggressively ridiculing any perceived negativity. They will not make constructive or meaningful points, but rather, deconstruct everything into a meaningless points-scoring match.

Avoid engaging this poster at all costs (albeit, having a laugh at their expense is also recommended).

The Smart Attack Dog

This poster will defend their stock to the hilt by aggressively defending any perceived negativity. They constructively argue their points, but with an overly optimistic base-lines and unrealistic expectations about future possibilities. 

Some of the more smart-ass posters of this type, will sometimes drop-in incredibly accurate information as a means to build trust and to encourage someone into offering out their hand of support — before suddenly snapping their jaws shut and gnashing someone to the bone.

It is also advised not to engage this poster type, but instead of laughing at them like The Dumb Attack Dog, it’s more advisable to take down some notes regarding what they’re saying and why. Leave the personals out of it — Investing is just business.


Dangerous Influencer

The Dangerous Influencer is a pro-active version of the Smart Attack Dog. 

The dangerous influencer generally has above average intelligence and has often been successful in a field other than investing. They’ve arrived to bring some alternative viewpoints to the table, and they’re often worth bearing in mind, but not selling out for.

The Dangerous Influencer is usually very articulate and convincing and will post seemingly well-researched content as to why the stock is a good investment. The problem is that they are “in love” with the stock, and the written research created by them is generally an attempt to convince themselves as to why they have invested, rather than analysing the fundamentals.

Their well-researched posts are very articulate, extremely optimistic and come with extreme valuations based on flawed, over-optimistic logic that could leave the most lenient Compliance Man with raised eyebrows. Because of their above average intellect, Dangerous Influencers are very confident, with genuine conviction about their investment decision having worked so hard to convince themselves and others.


Their behaviour is not malicious or devious in any way, they truly believe in their mind what they are writing, and it is unfortunate that many others also get convinced, to a degree they are not comfortable with.

After a period of declining stock prices, the Dangerous Influencer will generally realise that their investment is not working and turn into a “basher”. The time it takes to fall out of love with the stock varies from a few months to years, and the degree of subsequent bashing will vary.

Cheer Leading Chief

This poster will somehow take any negative information and paint it as a positive for the company. Their delusional never-fading glee-infused optimism could endure holding a wad of banking stocks during the GFC.

Some posters will proudly state they are in love with a stock or that they are invested 100% in the stock. Either option is bad. They are not capable of seeing any downside to a stock which is a very dangerous enterprise, indeed.


Consider this type of poster, as a poster-boy of how not to invest.

The Bargain Hunter


The Bargain Hunter will post overly negative analysis on a stock, thinking that their actions will somehow cause a drop in the stock price. This may be because they are trying to purchase stock and want to buy-in cheaper, or they have sold out and want to validate their decision by seeing the share price drop.

It is extremely unlikely that overly negative or positive posts on the internet will have any effect on a stock price, unless the stock is highly illiquid.


It’s possible, and many seem to try, but the likelihood is that users account will be suspended before any significant share price changes occur.

Bargain Hunters are much better indicators of other, less tangible factors that indicate other phenomena such as growing unease about a stocks lack of liquidity, or possibly some incoming news flow coming around the corner given the drought in activity.

It may be a catalyst everyone’s been waiting for.


Troll Basher


The Troll Basher posts overly negative information in order to get a reaction from other posters. This is usually done purely for amusement purposes or to satisfy internal psychological imbalances that require sacrificial lambs in the digital realm. 

They do provide a somewhat Natural counter-balance to the Trolls, helping to keep their growth rate tally in check.


Trolls bashers are in fact harmless, but their words can upset people because they have no boundaries or limits to what they will say. Anonymity protects them, although trolls are routinely banned for particularly heinous transgressions.

In real-life, they would never dream of saying the things they do online, which is part and parcel of the raging argument over what constitutes ‘free speech’ in modern society, with such cutting-edge technology available en masse.

It is recommended to sometimes sit back and enjoy the fireworks when these archetypes collide, if not for the sight of seeing grown men and women squirm, clench and berate each other for pretty much anything you can think of, including; which drill hole has more potential, or which country best suits a company’s new capital raising round.

Paid Basher

In some rare instances, a person will be paid to go onto a stock forum to post negatively about a stock. Or vice versa, talk a stock up.

Paid Bashers are typically highly intelligent, well trained, determined and almost always with a single objective to concentrate on — which makes all their treachery all the more effective.

Paid Bashers are the equivalent of lobbyists, only with far less importance and they’re paid a lot less.


However, they can be just as effective in getting an idea some traction, as an exorbitantly compensated US lobbyist on Capitol Hill. If an idea strikes a nerve, it can spread like wildfire regardless of whether it’s true. Lies can circle the world before the truth gets its boots on, remember.

Paid Bashers use anonymity and they’re cheap as chips to hire. So, it’s no surprise some companies, or individuals, hire them to do their dirty work in getting ahead of the competition.

With the growth of social media, their number and level of influence have only grown. T
here is very little anyone can do, to decipher someone else’s motives or who’s putting bread on their table — so the best way to deal with these posters is to be mindful of their patterns and keeping an eye if a particular chat room patron is grinding his/her axe a bit too much against one specific company or individual.

Pragmatic look at online chat rooms


Trusting people online is fraught with danger, but it’s not always a nightmare and good friendships can most definitely begin in chat rooms. However, this takes time and a care for investing, or the topics being discussed.

It’s important to realise that not everyone in a chat room is looking to provide fellow readers with “helpful advice” and that their intentions aren’t always honourable. Once you know what to look out for, you will be easily able to identify exactly what you are dealing with.

Sometimes chat rooms can erupt in overly positive hype, giving the inexperienced investor the impression that the stock price is going to increase significantly at any moment and they will miss out by not buying. Every poster is predicting massive price rises at any given moment, while most posts come across as very articulate and convincing posts seem to be being posted at a rate of knots — that's the first warning sign.

The feeling of missing out is very difficult to resist and many will invest based on chat room hype alone. Never invest solely on information from a chat room. Trust yourself and trust your research.
  

If you’re wondering what ‘regret’ looks like, consider Manny Greenmeek's story.


As a middle-aged man, Manny squirrelled away over $100,000 during his career as a website developer in New York, before moving to Australia with a view of peaceful retirement. 

Having discovered the gravitational powers of small-cap commodity stocks from a suddenly-thrifty Tesla-car-wielding friend, Manny decided to do some nosing around to see if he could find a suitable investment opportunity in commodities — it’s Australia’s bread-and-butter after all.

After reading dozens of analysis research papers and broker recommendations, Manny visited a popular internet chat-room to put across his investment idea to the rest of the online investment community, purely as a way of getting a second opinion on his chosen stock.

Manny plumped for Lithium Australia (LIT), an Aussie lithium explorer and “eventual mid-cap producer” according to the reams of information he found. LIT had a lot going for it at the time with high hopes of proving up a bulky JORC Resource and commencing early-stage sales.

LIT had also just acquired a bucket-full of new exploration tenements and was mobilising its geologists for a significant round of drilling and assaying (a pivotal juncture in any resource companies development path).

All in all, despite some uncertainties, 
Manny was confident that LIT could deliver on the promises to its shareholders, conduct he necessary drilling, and with enough luck, obtain the desired drill results to warrant an increase in its valuation.

Once he posted his message and investment rationale, he received over a dozen replies.

They ranged from supportive messages wishing him luck, to critique-filled diatribes postulating that 
Manny had picked a “market mutt with flea infestations to be discovered at the next AGM”. Others called him a “market noob” who was so out of his depth that he should “consider jotting down stock codes onto a dartboard” so that “blindly-thrown darts could make a better decision for him”.

One poster, had the audacity to encourage 
Manny to “ingest some lithium to help with Manny’s delusions, rather than waste time adding a lithium stock to his portfolio”. Manny was convinced his stock was well-researched, well-run and was on course to make money, but the mixed responses he received had put a bit of a spanner in the works, and some doubt into his heart.

If regular chat-room visitors with no identity, location or reputation had no confidence in Manny’s investment idea, should he pay attention and change his original intentions?

The correct answer is no. 


Manny should take into account as many opinions as possible, but, have the confidence to select a stock based on his personal criteria and sufficiently-sized stones to pull the trigger in adding it to his investment portfolio.

However, this is what 
Manny actually did…

Having read the dozens of mixed posts; for some unknown reason, only the negative ones stuck in his mind. What if he lost all his money? What if the company announced a flea infestation at its next AGM? 
What if lithium as an industry, got off the ground about as far as Pets.com did back in 2000?

The fear got to 
Manny and he did the sensible thing of unloading his musket, to be reloaded and fired upon a different listed stock — at some future time when all the chat-room replies were in agreement.

Having stepped down from the batter’s box without taking a swing, Manny waited; and watched in disbelief as LIT announced the development of a proprietary technology to satiate the world's clamour for ready-made high-grade lithium, obtained fantastic drilling results and even had market analysts sniffing around for an early off-take deal. LIT shares were off to the races from $0.10 to $0.48 in just a few days.

Meanwhile, lithium prices soared higher on the back of Elon Musk being Elon Musk. There seemed to be gold and nickel explorers turning their cloaks in droves, in order to search for lithium. Even dusty old lithium projects in the US were coming out of the woodwork, lured out by an escalating lithium price and the prospect of Tesla vacuuming up all their production in nearby Nevada.

LIT and lithium were hot news, and best of all, it was an Aussie company flying the flag high and true on world markets. 
Instead of celebrating new wealth in his newly-found country and basking in his newfound fame at his premium-priced tennis club, Manny was livid and the Aussie blues were setting in.

If only 
Manny had listened to his own research, his own intuition and his own thinking process. If only Manny had a sufficient understanding of risk-management to realise he didn’t have to lump his entire nest-egg on a stock.

Even a conservative investment of $10,000 could have netted 
Manny around $48,000 in pure unadulterated appreciation — and who doesn’t like appreciation?

Instead, Manny resorted to dwelling on his fears and started focusing on what he wanted to happen, rather than what was happening; so naturally, greed soon took over.


Later that day, frustrated by his close-but-no-cigar brush with his first whiff of above-average investor returns, Manny decided not to be indecisive ever again. From now on, Manny would only listen to his own intuition and research.

His next step was to visit the same internet chat-room, where he effortlessly and in just a few seconds, spotted an incredible stock which one chat-room user called “the next best thing since Google” when describing an app that was able to collect gift vouchers from online vendors and stack them into an easily accessible app.

The app promised its users savings of over $175 per year and was planning on scrapping its $20 per month subscription which one chat-room poster said would “take the shackles off this fine pedigree of a mustang of a stock”.

The app was considering switching its monetisation strategy to operating a permanent freemium model and was to rely on user donations for all its revenues. 
Manny liked the charitable angle very much. 

Most of the chat-room users were loving this stock and were in cahoots about recent news that it had finally updated its website and would be changing its logo before the end of the year. There was even talk of deals with unnamed Chinese distributors, who promised to disseminate the app to all of China's 1 billion-strong population within months. Even pre-pubescents would be downloading the app and adding to this"commercial juggernaut in the making with billions in positive cash-flow forecast in the near-mid term", as one broker-sponsored analyst put it.

With all the chat-room loiterers in support, and with a new trade idea reacquired after the narrow miss with LIT — 
Manny was ready to collect his 400%+ return on the voucher-aggregation idea.

Then, 
Manny made his last (and most hurtful) mistake by choosing to up the ante with his investment size. From a budget of $100,000, instead of allocating a sum that is adequately weighted in proportion to his personal circumstances (and obtaining some professional advice), Manny decided to slap down $50,000 for his first-ever small-cap investment.

Anyone want to guess what happened next?


Well, nothing.

After 
Manny contacted his broker and sent over half his nest-egg; 30 days later and the stock continued to sit there at exactly the same price as when Manny first made his swing.
Days turned into weeks, which turned into months…

One very anxious year later, which included a wedding, a funeral, his son’s first steps and meeting a woman he was secretly attracted to, the company announced an “unfortunate shift in prevailing market conditions with respect to the company’s operational space”. 

The company also announced it intended to conduct an emergency capital raising to replenish its operational budget, and offered existing shareholders the opportunity to buy more stock at a price half of what 
Manny paid a year earlier. Manny was feeling very anxious indeed as his $50,000 was about to go down the proverbial swanny.

Gripped by fear and blinded by greed, 
Manny did the unthinkable. Manny put his other $50,000 in the same stock in the hope of getting all his $100,000 out as soon as the company’s price moved up a little.

According to one chat-room interloper, “averaging-in to a stock is how the pro’s do it because it’s all about doing the opposite to the rest of the market”. Another poster agreed with this statement and added, “Investing is easy, and it’s like in Wall Street — you buy when everyone is selling, and sell when everyone is buying”.

This sounded like complete sense to 
Manny; after all, the pro’s all made money, and Manny could emulate them by following the words of wisdom found on a website hosted in Nigeria. Manny called up his broker, to inform him of his intention to double-up on his investment. The broker’s smile wasn’t visible to Manny, and neither was the broker’s grimace when Manny told him his portfolio now had 1 small-cap stock with $100,000 invested.

The broker collected his commission, said a prayer for 
Manny and went on with the rest of his day.

One month later, the company 
Manny had all his eggs in, announced that “subject to unfortunate changes in the company’s capital position, combined with unforeseen asymmetric developments in the global economy, the Company’s management regretfully announces the Company will be imminently entering bankruptcy proceedings, and will be closing all operations immediately”. Manny was horrified and felt as if the market was out to get him and eat him alive.

He actually knew the market was out to get him when he scrolled down to the bottom of the press-release to read: “According to standard procedure, all the Company’s existing creditors will be paid back in order of priority. Direct creditors and bondholders would be paid back first of what there is to be salvaged from the company’s liquidation. Common stock holders would be paid back only what auditors left behind.”

So not only had 
Manny paddled down a dead-end creek, he was also last in the queue to paddle out.

Upon spiling his thoughts and feelings onto the same chat-room that got him into all this mess, 
Manny received replies of commiseration and support. He also received multiple messages bearing insults and jokes made at his expense.

One poster called 
Manny’s string of actions "a dumbfounded quagmire of commercially epic proportions equal only to ordering an online bride, or making an investment with a Nigerian customs official via a Gmail account”.

Eventually, after much self-reflection and heartfelt introspection, 
Manny came to the conclusion that the market was a bit too difficult for him and that he was simply out of his depth. 

After telling his wife of his experience, and her driving off in haste with their two kids, Manny only had the family poodle with whom to share his pain. The romantic interest Manny had kindled on the fly during his market-entry phase, dissipated like flatulence in the wind when she heard of Manny’s ill-discipline with the family purse strings at a time of family need. That’s not the kind of man a woman could depend on.

With everything else swirling around him, 
Manny felt like the waltz of life was closing in on him, and to make things worse, Manny was struggling to afford it with all the post-GFC tax increases and alimony payments that weren't going anywhere other than his local magistrates court. 

It was the Age of Austerity alright.

Manny Greenmeek has now gone back into IT, as a part-time consultant. His main job is teaching IT classes at his local school and community centre. He hasn’t returned to stock market investing but is considering opening a Forex trading account in the near future.

The moral of the story is that speculation, hype and having the odd swing is great if you stay disciplined and do not get caught up in it. And never ever invest more than you can afford to lose.

Stick to your own research and only use internet forums to gauge sentiment of other people and investors. Ignore what people on the internet tell you to do or if they seem coercive in their remarks.

Sometimes, you may even be in a stock which is benefitting from hype. The best strategy if you find yourself struggling to catch a breath because of all the late nights hammering out chat room posts — go against the herd and sell some of your stock at a profit during the hysteria.

The price will generally creep back down after everyone comes to their senses, and this can provide a great opportunity to buy back in. Selling when the whole chat room is in hysterics about a huge imminent price rise is hard to do, but once you get used to it, it is quite fun to watch the confused discussion when the rise never eventuates, and you get to take some profit or get some more stock.

Chat rooms are also useful to gauge the general sentiment around a stock and whether there is too much hype around a stock. If there are literally so many posts that you can hardly count them, then chances are the smart money may have already left the building — while you’re still considering getting into the elevator. 

Venturing into the Jungle of Online Financial Chat Rooms

It’s important to remember that not everyone who gives you bad advice is your enemy, and not everyone who gives you good advice is your friend. That’s stock investing: it’s a personal thing that should not be delegated to anyone else regardless of hype, attraction, trust, closeness of kin, friendship, tip sheets or chat-room forums.

Stock investing must be about strong research done by oneself, overlapped with a discipline over one’s own risk management and personal choices.

Small-cap stocks should never be used as primary investment opportunities, with one or two stocks holding all the risk. If you have your risk management well versed, then any one investment in a small-cap stock shouldn’t leave you rocking and full of anxiety, if the worst does happen and your investment takes a significant hit.

So, remember to be as picky about with whom you place your trust, as you do with whom you place your money.


Written by George Tchetvertakov