A Return To Irrational Exuberance?

The Sarbanes-Oxley Act of July 2002 was supposed to help reign in the worst excesses of the bubble stock markets. After 18 months, it can basically be categorized as failure as investors are still throwing money around without concern, despite the new disclosures and despite a massive expansion of the government bureaucracy.

The SEC has seen its budget nearly double since 2001. The number of bureaucrats has gone up by nearly 700 in two years. All of this in an effort to enforce "full disclosure."

Problem being, despite the full disclosure, investors will still throw money at whatever penny stock they get pitched - disclosure or not.

I get these pitches almost daily. In fact, I got the same pitch, exactly the same, 6 times in one day. They all try to pump up the stock and make it sound like the greatest thing since Microsoft as an IPO. The reports, of course, don't mention any of the potential downsides. They don't mention the risks of investing in a Bulletin Board stock - in fact, they promote the OTCBB as a benefit of the stock (it is most certainly not!).

And while many people do as I do and simply delete the email as spam, there are enough people looking for the easy way out to push up the price and volume in the stock well beyond the normal range. Some people come out smelling like a rose. Most end up getting soaked when the promotional period ends and the price and volume return to normal levels.

If you're thinking about investing money, whether it be as a trading position or an investment, please take the time to research the stock. The reports coming via email are not valid research. A quick, cursory research done after receiving the email will not be sufficient either. There is no worse feeling than buying a stock only to find that when you want to sell it, there are no other buyers. And I have talked with many people who have ended up in exactly that position. I've seen people who chased every hot Bulletin Board tip, only to end with an account full of non-liquid positions.

Irrational exuberance - chasing the latest, greatest hot stock - are the greatest threat facing your retirement accounts today. More than corporate malfeasance. More than shady brokers. Your own worst investing enemy is emotion.

Take the emotion out of your investing. Before instituting a position, make a plan. How much profit do you want (reasonably!)? How much loss can you stand? What financial criteria are important to you? Then stick to your plan!

The government, no matter what the Act they pass, cannot protect you from yourself and your own irresponsible acts. Take the time to act rationally. It is the best investment strategy you can employ.