It happened once again: Shares in a stock were brought low by a mistakenly posted and completely untrue news story based on a death. First, it was the accidental reporting of the pre-written obituary of Apple (Nasdaq: AAPL ) CEO Steve Jobs. Just yesterday, it was the false rumor of the untimely death of a company: United Airlines parent UAL (Nasdaq: UAUA ) .
In the case of Apple, the damage was minimal because the story ran just as the markets were closing and Bloomberg -- the news outlet that mistakenly ran the obit -- quickly caught the error. Not so with UAL, which for nearly 15 damaging minutes saw its shares cut by as much as 75%. The cause: A six-year old story about UAL's 2002 bankruptcy filing somehow got pushed to the forefront of news sites like Google (Nasdaq: GOOG ) , and others ended up running with it.
Did you hear the one about ...
False rumors are nothing new with stocks. Just this past June, an anonymous poster on investing website SeekingAlpha wrote an article that spooked investors in Microvision (Nasdaq: MVIS ) , causing its stock to drop 20% before the info was found to be false. And it doesn't have to be a negative rumor to ultimately cause harm to investors. Plenty of politicians and regulators have been publicly saying there's nothing wrong with Fannie Mae (NYSE: FNM ) and Freddie Mac (NYSE: FRE ) , only to have the rug pulled out from under them this weekend.
The burned hand learns best
The lesson here is that you should know what it is you're investing in before you put your money on the line. While a good number of investors are betting on the technology that Apple offers to keep it ahead of the game, that scenario contains an implicit reliance on Steve Jobs remaining at the helm for years to come. His creative genius is part and parcel of the Apple mystique.
That's similar to the situation at Berkshire Hathaway (NYSE: BRK-A ) , where the health of Warren Buffett has to remain uppermost in investors' minds. While there is at last a succession plan in place for Berkshire, the unique abilities Buffett brings to the table will undoubtedly cause Berkshire shares to fall precipitously -- initially, anyway -- when he dies.
Just the facts, ma'am
That doesn't mean you shouldn't invest in Berkshire Hathaway, Apple, or any other particular company. Rather, it means that understanding the risks you face beforehand will lessen the chance that you act irrationally when a particular event occurs -- or even a rumor is spread that it has.
Indeed, knowing the risks and planning for them allows you the opportunity to capitalize on them should they eventually play out. You can pick up shares quite cheaply by being ready for the worst and acting when it comes.
Following these simple, common-sense rules ought to be enough to keep you from reacting -- and overreacting -- to innuendo and suggestion. That way, you'll ensure that when you do invest in a company, you won't see your money wiped out by some rumor.
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