Stock Spamming for Profit - A Sucker Born Every Day
First social networks for stock picking and now this: empirical research showing how stock spamming is a profitable strategy, and those who fall for this lose, on average, 5.25% within the two-day period following the hype. These were the results of a study by professors Laura Frieder of Purdue and Jonathan Zittrain of Oxford. BBC News wrote a nice summary of this research study, and drove home the key points of the abstract:
E-mails typically promote penny shares in the hope of convincing people to buy into a company to raise its price.
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The team found that a spammer who bought shares the day before starting an e-mail campaign and then sold them the day after could make a return on his or her investment of 4.9%.
“If he or she were to be a particularly effective spammer, returns to this strategy would be roughly 6%,” they wrote.
Conversely, if someone who received the message chose to invest $1000 (£530) in a promoted company they would be left with $947.50 after two days.
Victims of a large e-mail campaign could be left with $930 after two days.
On average a victim loses $52.50 for every $1000 invested.
However, real losses would be even greater, the team suggest, because the victim would also have had to have paid fees to buy and sell the shares.
Suffice it to say, this is some ugly, ugly stuff. Professor Bainbridge, a law professor at UCLA, also wrote a post concerning this issue. His focus was more on the theory of whether or not stock spam could be successful in an efficient market and the difficulty of being an investor and trying to take advantage of the stock spammer’s activity. To me this perspective is interesting but not relevant to the real point: why are tens of thousands of people sufficiently gullible as to fall for this “pump and dump” b.s. again and again and again?
My theory is that the mind-set of those who try and take advantage of “tips” imparted through stock spam is similar to those I described in my earlier post on social networks for stock picking - they are entertainment-seekers for whom deploying capital (now, I am specifically NOT using the term investing) is a game, not a vocation. As a result, the emotional state of those responding to stock spam is akin to that of a gambler - trying to make a quick score, trying to be smart, wanting bragging rights, wanting the “high” of a profitable trade. Mind you, this bears no relation the mind-set of a professional investor (or even the prudent amateur): a keen focus on strategy, controlling all the variables you can, long-term orientation, risk mitigation, taking a deep breath, thinking and then thinking again before entering a position.
I have always thought that gambling, in general, gives rise to externalities because it preys on the weakness of the human spirit and the desperation many people feel. That said, regardless of whether or not stock spam gives rise to a similar externality, until the returns are squeezed out and the “dumb money” stays away, it will be here to stay. My advice to those who think my perspective has redeeming value or for whom any of this or my previous post resonates: JUST SAY NO. The “rush” of a successful trade is a drug (and a highly addictive one at that) for many, and I entreat you to stop. Please.
