StockWatch
The Enemy Is Us
In early September, lots of investors were playing the blame game after Google inadvertently re-circulated a six-year-old United Airlines (UAL) bankruptcy story, and UAL Corp.’s stock plummeted by approximately 70 percent.
But, I’m not sure that the popular search engine is the ultimate culprit. In the final analysis, I suspect the blame lies with investors’ gullibility in giving the benefit of the doubt to virtually everything they read, which, in turn, leads them to buy or sell first and ask questions later.
In fact, a comprehensive study of investor behavior shows that their reaction to the bogus United Airlines story is just the tip of the iceberg.
You know all those spam email messages about some penny stock that is about to skyrocket and make you rich? Most of us consider them annoyances at best, and spam filters are being updated all the time to try to catch them before they fill up our email in-boxes.
Well, guess what? They actually work. The stocks mentioned in those messages actually tend to go up in price.
That, at least, was the conclusion of the study, “Spam Works: Evidence from Stock Touts and Corresponding Market Activity”, written by Laura L. Frieder, an assistant professor of finance at Purdue University, and Jonathan L. Zittrain, Professor of Internet Governance and Regulation at Oxford University and a visiting professor at Harvard Law School.
Don’t think for a minute that you can actually make money from the price run-up associated with these spam email messages, however. That’s because the unscrupulous pump-and-dump operators who are sending out the spam will be selling the stock they bought a day or two previously.
For example, the professors found that, on the day prior to a heavy spam email campaign, the average touted stock gained 4.6 percent more than the average non-touted stock. On the day after, in contrast, its average return was 5.9 percent lower.
Are investors really that gullible? Evidently. The professors’ analysis leads to no other plausible explanation: Spammers are buying a stock at a relatively low price, seducing gullible investors with their email blasts and, then, selling as those gullible investors are buying.
Furthermore, given how pronounced the pattern was that the professors discovered, it’s not just one or two unsophisticated investors who are believing the hype contained in the spam. In fact, the professors found that stocks touted by spam enjoyed a huge increase in trading volume on the days the messages were sent.
So, as we play the blame game about the role played by Google, Inc. (GOOG) in the spreading of the rumor about UAL in early September, we might remember the famous line from the Pogo comic strip from many years ago:
We have met the enemy, and it is us.Mark can be contacted via email at mhulbert@marketwatch.com.
