Last Updated on June 24, 2019 by Chris Stang
Whether you use Yahoo Message Board, SeekingAlpha, or StockTwits, these forums have similar benefits and drawbacks. First, they allow for the transfer, discussion, and debates on thoughts and data between individuals from various backgrounds. This can help individuals think critically about their investment theses while also ensuring they have not missed a recent update, change in estimates, or new development. That being said, these sites have many risks as well.
As mentioned, the individuals sharing information may have very different backgrounds. They could be a self-taught traders, subject-matter experts in their field(s), or someone with very little knowledge of the sector. That is why it is always important to take things from these forums with a grain of salt. Don’t get me wrong, there can be very good research and information shared on these sites, but it can be difficult to sift through the “pumping” and other information shared to find the truly valuable tidbits. Typically, I pay close attention to the stocks and performance of the stocks people discuss on forums. With limited amounts of time in the day, it is best to prioritize who and what to read. If someone is consistently discussing stocks that they like and those stock prices are consistently depreciating, I will likely prioritize their thoughts much lower. On the other hand, if someone is discussing stocks that are consistently performing well, that is someone I am more apt to pay more attention to.
On a more global note, I would like to discuss two very dangerous things that I have seen increasingly prevalent on forum boards. The first, is GroupThink. GroupThink is “when a group of well-intentioned people make irrational or non-optimal decisions that are spurred by the urge to conform or the discouragement of dissent.” Essentially, people are scared or less willing to go against the grain as they seem to value harmony and coherence versus over rational thinking. This can result in people avoiding expressing their concerns and risking disturbing the harmony of the board.
This leads into a second observation I have found on many of these boards, that is, confirmation bias is running rampant. Confirmation bias is “when people would like a certain idea or concept to be true, they end up believing it to be true. They are motivated by wishful thinking. This error leads the individual to stop gathering information when the evidence gathered so far confirms the views or prejudices one would like to be true.” It is a shame that society has come to set a precedence where individuals are unable to disagree on a discussion point without being completely at odds. Just because someone has a different opinion or interpretation should not mean that you need to be completely a odds with them. I believe that this phenomena is largely the result of confirmation bias, and it is seen especially on forum boards. If someone is bearish on a stock with a reasonable thesis, they are brutally attacked and dismissed, as it does not conform to the boards confirmation bias and groupthink.
That is why when I get on the forums, I look for those that go against the grain, those who do not conform with the confirmation bias. There is an age old saying that you should keep your friend close, and your enemies closer. I find this especially helpful when approaching forums. If you can critically evaluate and deconstruct a bear thesis for a stock you’re long, or a view that is opposite yours, then you have done your share of due diligence and are making informed trades. If you swiftly dismiss a thought that doesn’t comply with yours, you are predisposing yourself to missing a point that might alter your investment thesis.
These concepts of group think and confirmation were very much on display for a few boards I have recently followed, and can easily be recognized once you are aware of what they are. First, earlier this year I saw such habits and psychology on AVEO Oncology (AVEO) boards, when I pointed out that TIVO-3 would not ameliorate the FDA’s concerns raised pertaining to the TIVO-1 trial. Such discussion was swiftly dismissed, however such points came to fruition and resulted in a swift sell-off in AVEO’s stock price once the FDA revealed they recommended against AVEO filing their initial TIVO-3 data. Another time I have recently seen this was on Verastem Boards. Symphony numbers have been available on several public boards, and for the first commercial quarter, they were dead on accuracy-wise. When sales were floundering in 1Q19, many on the board began making irrational explanations as to why the sales weren’t growing to appease their vision as a long, when there was proof in that past that the numbers had been accurate. This only goes to show that one needs to be careful as to how and what they believe on these forums.
In conclusion, I hope this piece has provided an initial starting point to help you be more aware of the psychology that can taint forum pages. As I mentioned above, typically when I approach boards, I look for the posts that go against the grain to critically evaluate them, and determine if they have any merit, or are not based on facts. If you have more time, I would strongly recommend reading more about confirmation bias and GroupThink. They are very interesting topics that once you are aware of, can be easily recognized and help you avoid being baited into situations that you may regret down the road.
I have no position in any of the stocks mentioned in this piece.
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