Using Online Forums 1 comments

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More experienced investors would know better than to base their investing decisions on rumours passed to them by friends, much less strangers. Thus it would be wise to treat stray talk about the various "hot" stocks on online forums with a heavy pinch of salt. In the course of my investing, I have however also learnt to appreciate the value of such forums in several aspects.

First and foremost would be provision of additional insights into a company I might be researching with a view to possible purchase. I have already highlighted in an earlier blog (The Case FOR Analyst Reports) the value of brokerage analyst reports in supplying the investor with additional facts about a company to aid his understanding and final decision; provided he learns to sift the facts from the opinions (often biased) these reports are an important tool in the fundamental investor's arsenal. And so it is with online forums. There are often many investors willing to share their honest views on various stocks, and if the individual remains humble and keeps his mind open he will find that there are many other alternative views about a certain stock different from his own and yet just as valid. Thus online forums can also act as a sounding board for the investor to test the strength of his beliefs, and could even be considered as part of the research/due diligence process.

Secondly, the online mood about a particular stock often is an accurate sentiment indicator. Some investors might have observed that when a stock has achieved such cult status that it is hyped day after day by investors but yet continues to plateau it might be time to turn contrarian and start to sell any holdings in this stock. That's because any optimism is likely to have been priced into the stock already. An example would be HG Metal which was heavily hyped on some online forums earlier this year but lost momentum and dropped on the first sign of bad news about peaking steel margins.

Thirdly, online forums that have existed for some time would have forum archives that supply the investor with a good historical understanding of a stock, provided he is willing to read through early postings. There is something in these historical forum postings for different investors: chartists would note the historical trading bands and stock price/volume actions; fundamentals investors would be able to see beyond the current year's business outlook and observe long-term industry prospects (say last 5 years) as well as key risks that might not be currently apparent but might have manifested themselves in the past. Shareinvestor.com used to have a good archive of such historical forum postings until it recently closed its forum to only paying members; when I joined them recently I found that these archives had disappeared, probably due to them revamping their database system. It is such a waste.

Ultimately, the investor must exercise his judgment when reading potentially biased opinion pieces by forumers on online forums; however to ignore them completely just doesn't make sense; it is akin to resorting to public transport although you own a car simply because you don't know how to drive. The correct attitude to take should be to start taking driving lessons.