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INVESTING: Beware of advice as you seek wisdom on Internet

August 25, 2008

Most people abide by the doctrine that you cannot believe everything you read. That principle is all the more relevant today for anyone accessing the massive reservoir of information available over the Internet. The latest Web trend is the "blog," where anyone with an opinion and modest technological know-how can instantly appear to be an authority on a chosen subject.

Investors need to be particularly alert to "articles" that on the surface may pass as knowledgeable, yet upon closer inspection are devoid of rigorous analysis, or reach flawed conclusions due to errors.

I recently was reading news about one of our stock holdings and happened to click on a link that took me to a popular financial blog. The author was analyzing the holdings of a large hedge fund and was contending that regulatory filings showed the manager had doubled its position in this particular stock. The blogger argued that this was a "massive" commitment and that the manager's bet wasn't working out since the stock had declined in July. The blogger went on to write that the manager "might be taking a lot of pain from this holding."

Yet the entire premise of the blogger's argument was invalid because the hedge fund manager had not doubled his position-the stock merely had split two-forone the previous quarter. Yes, the fund now held twice as many shares, but at the split-adjusted price, the manger's holding was unchanged. This was a novice mistake for a blog that seems to be popular and hold some authority with investors.

When I come across these blogging sites, generally the more I read the less I'm impressed. I often spot mathematical mistakes, a line of reasoning that suggests only a partial understanding of the facts, or an outright lack of investing experience. So reader beware-many of us have heard the off-color expression about opinions, and it certainly applies to investment advice on the Internet.

One of the more recognizable providers of financial advice on the Web is The Motley Fool. The Fool, founded in 1993, gained attention by being one of the Internet's first organized sources of investment advice.

The Fool reached its peak in popularity during the tech-stock craze, only to have its followers suffer mightily in the resulting dot-com crash. Yet the business survived and its writings are still regularly encountered by investors surfing the Web. Fool articles appear so often that the business model appears to be: Throw enough out there and something might stick. The service offers links to reports on thousands of companies, but many offer only cursory analysis. Typically, they end with an offer to subscribe to one of The Fool's paid services.

And that is the overriding point to most of these Internet opinion sources-they exist mainly to drive Web traffic to their sites so they can sell additional services and advertising.

In the end, there is just no substitute for diligent research of the facts, resulting in your own well-reasoned conclusions, reached independent of the influence of crowds.



Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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