Apple investors: How to stay sane by staying long

Earlier today I had a quick chat with iMore’s editor-in-chief, Rene Ritchie about all the crazy rumours and bad journalism that Apple has had to deal with lately. But more to the point, we talked about how this stuff can hurt small time investors if they don’t know how to deal with it. So that’s what we’ll talk about here.

Let’s look at an example. Remember the recent stock split rumour? It came from this tweet by Doug Kass, president of Seabreeze Partners. This is a guy who used to have a senior position at hedge fund giant Omega Advisors, so obviously if he passes on a rumour people are going to see it and pay attention. Exactly 101 people retweeted that rumour.

I have no idea if he traded on this rumor or not -- I’m not going to even go there -- but the facts are this: the stock started moving higher right after the tweet was posted.

To be clear, if he hears the rumor and passes it on without knowing if it’s true or not, there is nothing illegal about it. But it opens the door to a lot of potential short term manipulation. It makes it too easy to profit by having a following. Based on my understanding of the law, you could hear a rumor that you think people would react well to if it was true. You could then take a long position (equity or options) and pass on the rumor. The bigger your following, the bigger your potential profit will be from this because your actions can move the market temporarily.

Whatever happened, or didn't happen, in this specific case, in general it's impossible to avoid accusations when it does happen.

If a simple tweet can move a stock, how about big headline in the Wall Street Journal? You want to really move a stock? Find a way to plant your full-of-crap story in the biggest financial newspaper in the world. Remember this WSJ story talking about the supposed cuts to iPhone 5 parts orders by Apple?

How would a reader know that this story might have no truthful foundation? Look at the sources. In financial journalism, whenever someone wants to be as vague as possible about a source, they’ll just say “people familiar with the situation”.

Sometimes these “people” are real and have actual information. An investment banker may speak to the media secretly about a pending takeover deal. It turns out to be true. But when it comes to supply chain checks like this, the “people” could just as easily be hedge fund managers who convince the WSJ that they have legitimate information which is completely fabricated. Or they could have real information that they stretch beyond reality. For example say you have a contact at a screen supplier that lost business from Apple. If you can convince the WSJ reporter that this information is real, you could just as easily stretch it to suggest that it means the iPhone 5 is not selling well. This would be in contradiction to the actual truth, of course, since Apple reported its best ever quarter following that story. And it was only one of many.

At the end of the day this stuff can hurt investors. But you can protect yourself. How?

Follows these simple tips:

  1. Realize that you will never have an information advantage over the pros. Most information is geared to short term results anyway. Just don’t pay attention to short term news and rumours when it comes to investing. It won’t help you.
  2. Buy a stock for your own reasons and sell when those reasons are no longer true. This will stop you from making emotional decisions and trading on rumours.
  3. Start to notice the wording that journalists use when they talk about information sources. If the source is vaguely referenced, there is a much higher chance of the information being complete crap. Refer back to rule number 1 and 2.

It's easy to lose your mind, much less your money, in the modern age of investment. Staying above the rumors and the manipulations is a good way to stay sane.