Please ensure Javascript is enabled for purposes of website accessibility

Spam Works

By Selena Maranjian – Updated Nov 15, 2016 at 5:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It just doesn't work for you -- so be careful.

Oh, dear. If you, like me, have been waiting for the junk mail that clogs up your email inbox to just go away, you might want to stop holding your breath. I recently ran across a good reason why spam may be here for longer than we'd like. You see, it seems that ... it works!

The kind of spam I'm referring to here is stock-tip spam. You've most likely seen its kind before. Let me share with you one example I recently received. To visualize it correctly, note that it sported some huge font sizes, along with much bolding, semi-random capitalization, and underlining for emphasis.

Let's pretend that the email I received was hyping a company called Home Surgery Kits (ticker: OUCHH). I'll also fictionalize some of its numbers -- but my points will remain the same. It started out by saying that OUCHH (the message referred to the company solely by its ticker symbol) is paying down its debt and will be profitable by the second quarter of 2007. It said the company's current market capitalization was "$850,0000." (Yes, you read that last zero right.) It stated that that the company is "a absolute steal" at its recent price level, especially considering that it has more than $35 million in revenues and is expected to rake in more than $45 million in fiscal 2007. Its stock price was expected to "easily see a move past $1.00 near term" and "it has major room for a breakout."

Sound exciting? Well, calm down. Sure, maybe it has revenues of $35 million. But that doesn't mean it's a moneymaker. Its net income for fiscal 2006 was negative -- a loss of several million, up considerably from 2005's loss of more than a million.

I received this email on Dec. 1. Two days earlier, the stock had been trading for around $0.40 cents per share. At the end of the day on the 1st, the stock was around $0.93 per share. Some three weeks later, it sat around $0.42. See what happened? Hype, surge, sell, implode. It's a common pattern with these penny stocks that causes many people to lose money.

Professor Laura Frieder of Purdue University's Krannert School of Management and Dr. Jonathan Zattrain of Oxford University studied such spam mails and concluded, "These spam schemes rarely make money for anybody but the spammer." Here's how they typically work, according to an article about Frieder from Purdue:

"The lure of the stock spam scheme is as old as stock speculation itself: Buy low and sell high. The difference is that, in many cases, it was the spammer who buys shares of penny stocks and then promotes the stock in e-mails. If even a few dozen investors pick up on those stocks, the momentary uptick creates a windfall for the spammer, who in many cases sells to the unwitting online buyer."

Think about it. If you buy $1,000 of a 10-cent stock and you illegally hype it up to a value of 50 cents, you can make a pretty penny, and you can profit just before the stock crashes on all of the people who drove the price up for you. This is not the most noble way to make a living.

As Frieder explained, "By the time an investor realizes that the increase in stock price is the result of a phony and orchestrated campaign, it is too late to get out without taking a loss."

It seems that some 730 million pieces of spam are emailed each week, and about 15% of them -- around 100 million -- are touting penny stocks. Frieder found that "stocks experience a significantly positive return on days when they are heavily touted via spam and on the day preceding such touting. ... [On] days when there is touting activity, the probability of a touted stock being the single most actively traded stock in our sample is 81%."

Innocent victims?
An interesting side angle to the study is that the managements and owners of the companies whose stocks are hyped in stock spams don't generally profit -- but they can end up suffering. Investors who lose money blame the companies, even though they didn't send the email in question.

The most obvious victims, though, are the investors who lose money in these scams. But I should really refer to them as speculators, since they don't exhibit the habits of smart investors, such as studying a company first and having reasonable criteria before buying and reasonable expectations from investing.

Don't let yourself fall prey to promises of easy riches via emails. You won't be the one getting rich.

Instead, look to get rich slowly, perhaps by investing in some solid, growing companies. Check out, for example, the average annual growth rates for these well-known companies over the past decade.

Company Average Annual Growth Rate
General Dynamics (NYSE:GD) 18%
FedEx (NYSE:FDX) 18%
American Express (NYSE:AXP) 15%
Staples (NASDAQ:SPLS) 17%
Target (NYSE:TGT) 20%
Duke Energy (NYSE:DUK) 8%
McDonald's (NYSE:MCD) 8%


Of course, past performance doesn't guarantee future results. If you're interested in finding some compelling investments that our Fool analysts think will appreciate for you over many years, I invite you to test-drive one or more of our rather successful investment newsletters. Our Stock Advisor newsletter, for example, is sporting average returns that more than double the market's return. FedEx is one of that service's recommendations. Check it out, and see for yourself.

Foolanthropy is celebrating its 10th year! To learn more about our five Foolish charities or to make a donation, visit www.foolanthropy.com.

Longtime Fool contributor Selena Maranjian owns shares of McDonald's. The Fool has a disclosure policy.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

McDonald's Stock Quote
McDonald's
MCD
$274.61 (-0.14%) $0.39
Target Stock Quote
Target
TGT
$166.32 (1.80%) $2.94
American Express Stock Quote
American Express
AXP
$152.14 (-1.30%) $-2.01
Staples, Inc. Stock Quote
Staples, Inc.
SPLS
FedEx Stock Quote
FedEx
FDX
$175.81 (-0.50%) $0.89
General Dynamics Stock Quote
General Dynamics
GD
$252.25 (-0.60%) $-1.52
Duke Energy Stock Quote
Duke Energy
DUK
$98.48 (-1.14%) $-1.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.