Two years ago, many people whose first name was definitely not Tracy, came home after a long, honest day’s work to find the following strange investment phone message on their answering machine:
"Hey Tracy, it's Debbie. I couldn't find your old number and Tammy says this is the new one. I hope it's the right one. Anyway, remember that hot stock exchange guy that I'm dating? He gave my father that stock tip on the company that went from under a buck to like three bucks in two weeks and you were mad I didn't call you? Well I'm calling you now! This new company is supposed to be like the next really hot thing. And they're making some big news announcement this week. The stock symbol is PWRM. He says buy now. It's at like 50 cents and it's going up to like 5 or 6 bucks this week so get as much as you can. Call me on my cell, I'm still in Orlando. My Dad and I are buying a bunch tomorrow and I already called Kelly and Ron too. Anyway I miss you, give me a call. Bye.”
Now I know what you’re thinking: you probably wouldn’t fall for it. NOBODY WOULD, RIGHT? So explain this: before the messages were left on thousands of answering machines, this stock traded around half a dollar on volumes of ten thousand shares a day. As more and more people listened to their answering machines, the stock rose to seven dollars, with daily volume exceeding two million shares.
As regular readers know, the InsideAlpha strategy has generally taken the other side of the trade: patiently waiting for hyped stocks to rise, and then profiting from the downside. In the case of PWRM (which IA didn’t target), it didn’t take too long until that stock went back down, all the way to under ten cents a share. That’s what these stocks all end up doing.
In the same fashion, people usually try to convince me that nobody ever gives a second look at unsolicited email. Well, a recent study begs to differ.
Thorsten Holz, a graduate student at the Laboratory for Dependable Distributed Systems at University of Mannheim in Germany, recently studied stock spam with his colleague Rainer Böhme of the Technische Universität Dresden. After carefully analyzing 22’000 messages, they found that the average stock would rise 1.7% on the day that one or more e-mail messages referenced the stock; the more spam sent, the greater the increase in the price of the stock, in general.
Not all players are investing rationally. So what are you doing about it? You might get upset because this great little undervalued stock that you bought a while ago won’t go up because, you reason, investors are not as rational as you are.
Marc Mayor is the owner and chief advisor of Swiss-based Inside-Alpha. Mayor's Inside Alpha stock investment strategy has now verifiably beaten the S&P Index by at least 18% for six years running with 5 times less risk regardless of up, down, or sideways markets.
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