Pumping and dumping

IT may be appropriate that this column follows Valentine’s Day since, in one sense, the “Day of Love” might be the best example of “pumping and dumping,” at least for the heart.

The term pump and dump (P&D) generally refers to price movements of any investment and, more specifically, to the stock market. It is defined as “denoting the fraudulent practice of encouraging investors to buy shares in a company in order to inflate the price artificially, and then selling one’s own shares while the price is high.”

Doesn’t that sound like many if not most men and women attempting to woo his or her Valentine and showing best behavior? I am sure my wife wishes I always acted the same way I did on our first Happy Valentine’s Day.

In love, as in the stock market, we all think the pump is great; not so much the dump and we would like to avoid it.

Biased and fake news may be a form of P&D also. The technique is to get people all worked up over a particular issue, perhaps to achieve a particular purpose.

It is difficult to trust the motives of anyone—especially the most vocal—in the biased-/fake-news discussions. Everyone seems to have a vested interest. And even the Dalai Lama flies first-class on airplanes, stays in five-star hotels and, recently, launched an iPhone application.

However, no matter how wonderful—and profitable in the stock market—the pump can be, we obviously want to avoid the dump side. I will offer more detail when I speak at the TGFI Financial Literacy Summit on April 8. But, for now, understand that the basic avoidance principle is the same for not being caught in a biased-/fake-news frenzy.

Initially, it is all about historical perspective. I know I whine about that idea constantly, but it comes back to “You can’t know where you’re going until you know where you’ve been.” Ask the question, “Why does this price move make sense based on how it has been trading?” Actually, you may see that the previous weeks’ or months’ action has been leading up to a large jump in price. Trade what you see, not what you want to see.

As in love—“why is he suddenly treating me so sweetly?”—what may have changed that would prompt buyers to push the price higher? Obviously, all the recent big moves in companies that may or may not be involved as the “third telco player” is a good example. And remember, just because it is “hype” does not mean that there is not a valid truth and reason for the price increase.

If you used common sense mixed with some caution on the pump, now avoid the dump. One critical and basic rule is, “If the reason you bought [hot tip, phase of the moon, corporate development] changes, run away.” No questions asked. You can always buy back in. If you thought your new love was single, and it turns out there is a wife/husband and three kids, things have changed. Get out.

From personal experience, you may be the best judge of when the dump is beginning. When you start feeling bulletproof—like after half a bottle of Don Papa rum—that is when you are most vulnerable. If you are in a pump and dump scam, that is right where the pumpers want you, and they are ready to leave you holding the bag. In short, it is best to never ignore your own gut feelings.

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E-mail me at [email protected] Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.

 

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