I am about to give you an incredible idea to make money in the stock market. Nobody is teaching this, not even the gurus and experts. What you are about to read will shock you. You are about to be blown away. You see, the only way to make a KILLING in the stock market is to focus on how to minimize your chance of loss. You do this, as the Buddhist admonition goes, by "knowing thy enemy". Let's begin. Reality check. Institutions are not in business to make you rich, they're in business to make themselves rich. The faster you understand who and what institutions really are, the harder it will be for them to take money from you. In August 2001, the acting director of the SEC testified before Congress that nearly all major Wall Street firms were guilty of lying to small traders and investors like you and I. A year later, the attorney general of New York Elliot Spitzer said that institutions engaged in secret operations that were "an outrageous betrayal of [investors’] trust and a shocking abuse of the system, perverted to produce greater revenues for the firm." Many years ago, research analysts at institutions would look at a company with a critical eye, find the problem areas, and disclose any weaknesses. That all changed in the 1990s. Before the 1990s, institutions made most of their money from commissions from the buying and selling of stock on behalf of their customer. This kept a certain accountability to the public with institutions wanting to do good by their customers. Institutions used to work for small, individual investors looking to buy shares in a company. But in the 1990s, that came to an end. In the 1990s, institutions began making most of their money from their parent banking divisions and for corporations. They began making huge amounts of money promoting and marketing shares for their corporate clients. This new reality still exists today. Institutions are now the enemy to the small, individual investor because they work for companies seeking to sell their shares to investors. Before the 1990s, most stock analysts' made their money via a flat salary. In the 1990s that changed to most of their compensation coming from bonuses directly linked to their ability to promote, and sell, a corporate client's stock. Stock analysts' were told that the more they help sell a client's stock, the more their "bonus" would be. Not every analyst wanted to deceive the small, individual investor. These "moral analysts" were told that if they issued reports that would hurt sales, they would be fired. In 2001, well before the Enron collapse, Chung Wu, an analyst at UBS PaineWebber, sent an e-mail to Enron employees warning them that holding the company’s stock — then worth almost $37 a share—could cost them "a fortune." The e-mail enraged Enron executives, who complained to UBS PaineWebber. Chung Wu was fired. UBS PaineWebber quickly issued a new buy recommendation, and the matter was secretly covered up. Three months later, Enron shares were selling for less than 25 cents. Not one major firm on Wall Street tied its analysts’ compensation to their actual track record in picking stocks. Analysts could be wrong once, wrong twice, wrong a hundred times, and they’d still earn huge bonuses, as long as they continued to recommend and sell the shares of their corporate clients. That’s how the institutional banking divisions wanted it and that's how it still is today. If you think the example of UBS PaineWebber was an isolated incident, you would be wrong, very wrong. Consider the once "hot" stock Infospace. Merrill Lynch was releasing analyst reports that said the stock was a "buy". Secretly, however, in e-mails uncovered by attorney general of New York Elliot Spitzer, Merrill’s analysts and insiders had a very different opinion. In a secret, internal email they wrote that Infospace was a "piece of junk." A piece of junk it was. Investors who trusted Merrill analysts to give them their honest opinion got sniped, losing up to 93.5 percent of their savings, investments, and retirement money when Infospace crashed. Merrill’s official advice on another hot stock, Excite@Home, was "accumulate". Secretly, however, Merrill analysts wrote in emails that Excite@Home was a "piece of sh——!" A piece of sh—— it was. Investors who trusted Merrill analysts to give them their honest opinion got murdered, losing up to 99.9 percent of their money when Exite@Home went under. Merrill's analyst report said to "accumulate" 24/7 Media. Merrill’s secret internal comments, as revealed by Spitzer, were that 24/7 Media is a "piece of shi——." Small individual investors who followed Merrill's "accumulate" recommendation lost 97.6 percent of their money when 24/7 Media crashed. Merrill Lynch was being paid hundreds of millions of dollars from the very companies it urged traders and investors to buy. Merrill Lynch paid their so called "analysts" millions in bonuses for marketing and selling stock in companies they knew were junk. Worse, anyone who dared to question these "analyst" ratings were quickly silenced. Merrill Lynch’s relationship with Enron is an example. In April 1998, two Merrill executives fired off a memo to the firm’s president, complaining about a Merrill analyst who was not a "team player". They said that this analyst had made the mistake of giving Enron a "lukewarm" rating and that Enron had developed a dislike for the analyst. They concluded that, as a result, Merrill Lynch had lost lucrative investment banking business with Enron. Merrill quickly replaced the analyst who didn't want to "play ball", with an analyst who promptly upgraded Enron’s rating to a buy. By early 1999 Enron had rewarded Merrill with a $45 million banking deal. Infospace, Excite@Home, 24/7 Media, and Enron were just a few of the dozens of companies that Merrill hyped. They were able to raise billions of dollars from investors as their stocks soared. Merrill’s investment banking division piled up more than $115 million in fees for 52 investment banking transactions awarded them by the very same companies they were hyping. Analysts who issued the phony buy ratings were paid huge bonuses. Meanwhile, trusting investors got ambushed and slaughtered. Attorney General Spitzer said that as horrible as Merrill’s actions were, other big brokers committed far worse financial atrocities. From 1997 to 2002, Salomon Smith Barney, a division of Citigroup, was paid $809 million in underwriting stocks and bond offerings for telecommunications companies, plus another $178 million providing merger advice. At the same time, Salomon Smith Barney was releasing analyst reports with strong buy recommendations on the very same companies that were the source of this billion-dollar windfall: AT&T, Verizon, WorldCom, Global Crossing, Level 3 Communications, Qwest Communications, and others. Small, individual investors and traders who trusted Salomon Smith Barney were slaughtered in the following blood bath: lost 77.8 percent of their money on AT&T, 92.6 percent on Qwest, 99 percent on WorldCom, 97 percent on Level 3 Communications, and 99.9 percent on Global Crossing. A total of 14 of the telecoms that Salomon Smith Barney recommended as a buy to investors defaulted on their debt or filed for Chapter 11 bankruptcy protection. Fundamental analysis (analyst research report) is the way institutions get inside your head and get you to buy the stocks they want you to buy. Technical analysis cuts through the BS and shows you what they are actually buying. In otherwords, fundamental analysis is "do as I say, not as I do" whereas technical analysis is "do as I do". It is better to buy what the institutions are actually buying rather than what they are telling you to buy. The lesson learned for small traders and investors is to NEVER listen to institutions recommendations on so called "analyst reports", and on cable or TV financial programs. I hope you enjoyed this article and please feel free to leave your comments below. Thank you and happy improved trading. Lance Jepsen
President, GuerillaStockTrading.com