These stocks rose quickly – wait 'til you see how fast they fall

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The English language is, for better or worse, extremely well suited for tricking people. Consider the sort of phrases used in stock recommendations: "This stock is racing higher!" or "This company doubles its revenue every quarter!" or "This company is paying a 17% dividend yield!" To be accurate and allowable, such phrased need only describe what happened in the past , but is that all they imply? The answer is no, of course. One reads "This stock is racing higher!" as descriptive of its instantaneous velocity, as if a stock actually had such a thing. Past facts, present tense, future implication.

It would be brilliant, if done consciously, but it usually is not. How do I know? Because those who write this way tend to trick themselves, sometimes to an even greater degree than they trick their readers. This mistaking of the trend for the forecast is not only commonplace, but an entire pseudo-science, technical analysis , has grown up around it, imbuing the misconception with a sort of talismanic authority.

It is an easy mistake to make, under some circumstances. I have made this mistake myself when describing revenue growth over time. In other circumstances, when describing dividend yield, for example, it can be an egregious error (or even deliberate deception). That's because when a company has such a ludicrously high dividend yield, what is most likely being expressed is the current stock price in relation to its trailing dividend. This typically means that the price of the stock has recently fallen sharply, and sadly enough (for those who buy these stocks without doing their own research) the price may even have fallen due to an announced dividend cut, meaning the old dividend rate is no longer even a trend, much less a forecast.

The trend is that these stocks are, or rather, were, climbing. Read on for the forecast.


Continue reading page 2 of this article


This article was originally published on MarketIntelligeneCenter.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Technology

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