Friday, February 10, 2012

A Worthless Stock Buyer, Observed in the Wild!

This is from an article on "" called "5 Stocks Under $10 Set to Soar". Before we start, raise your hand if you think that the stocks are expected to soar for fundamental reasons. If you said yes, go back to square one.

"Traders savvy enough to follow the low-priced names and trade them with discipline and sound risk management are banking ridiculous coin on a regular basis. [...] I definitely love to trade stocks that are priced below $10. I like to view them as a trading vehicle with lots of volatility and lots of upside when the trade is timed right."
Note that his emphasis was on "trade" - and on not getting caught holding the bag. He mentions three solar stocks (!), including Energy Conversion Devices.

Anyway, his comment about volatility is funny, because it is precisely the hypothesized reason for the worthless stock inefficiency. As Kumar (who calls them "lottery-type stocks") wrote,
"high idiosyncratic volatility is important in the sense that it may lead investors to amplify their perception about skewness. This would be especially true if they adopt an asymmetric weighting scheme and assign a larger weight to upside volatility and ignore or assign lower weight to downside volatility."
So... the "set to soar" article is another data point in support of our worthless stock theory.

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