Walking A Stock Up

I'd readily admit it - I do watch most of the financial related TV shows over the weekend. I usually Tivo them and scan for the stock picks and ignore the market predictions. Why do I do this - because I want to know what is being pumped up in the market. Generally, I use it as a sell indicator, not a buy as so many do.

Why? You have to realize that the vast majority of market pundits you watch on TV are not acting in your behalf. For those of you new to the game, here is how the process works. It is called by many traders as "walking the stock up" and it works like a charm most every time.

As a portfolio manager, you buy a huge amounts of a stock that no one cares about for very little money. The lower the liquidity the better. You do this in your own personal trading account - the one you use only for "sure bets."

Then you buy loads of the stock in your own mutual fund (thus helping out your original position). But, you do not sell your previous position right then. At that point, there would be too close of a trading connection. Instead, you wait and hold.

Then, as many of these folks often do, they issue a buy rating out to those who subscribe to their newsletter (helping out both their original personal buy and then the buy they made for their clients in the fund the manage.) This benefits nearly everyone, but especially their original position they made many months ago. The news services like Briefing.com will likely report it as well, giving an extra boost to the stock.

The last and final stages comes when these folks get on the bully pulpit by showing up to give their views on one of the numerous financial programs now offered by CNBC, Fox, and even PBS. The game plan is simple, when they are asked what stock they like the most, they recommend the same stock that purchased many months ago. And, just to make sure there are no conflicts of interest, they fully disclose that they currently own it as if that really mattered anyway. The question that these guys should be asked is when they plan to sell it AND more importantly, where they originally purchased it for any of their accounts (private and professional). You would be shocked to hear that answer, if they spoke truthfully.

Finally, once all of these steps take place, these guys aren't stupid, they begin selling their private holdings first, then their clients' holdings in their fund, then they change their rating in their newsletter, and they try not to mention it on TV again. After all, there are more eggs to fry, so to speak. On to the next one.

The problem with all of this is that the vast majority of the little guys come in at the end of the cycle and they believe that XYZ who is someone's stock pick of the year will continue to go up. The little guy believes that they should put huge amounts of money on it even though the good news and bullish expectations are already "in" the stock. Unfortunately, buying at the end of the cycle frequently has disastrous results, especially for the buy and hold investor.

How do I know all of this? More than a couple of portfolio managers have told me that they engage in this practice and have provided numerous examples over the years. This is Wall Street's little dirty secret and millions are made by walking stocks up in this manner. As an individual investor you have to understand that you're at the bottom of the totem pole in the marketplace. So, when you hear that some portfolio manager is telling everyone to buy XYZ, you know why. It isn't out of the kindness of their hearts they want to help you.