A random comment on a random stock blog got my ire up the other day. Someone claimed that companies like Barron's -- owned by News Corp. (NASDAQ:FOX)make top stocks lists in order to turn a profit on their investments. This claim was specifically that by having Apple (NASDAQ:AAPL) on a "10 Favorite Stocks for 2013" list, Barron's was attempting to drive up the value of Apple after having talked it down earlier in the year. Let's examine the facts.
Why move a market?
First of all, we need to acknowledge that loose lips do in fact sink ships. The Barron's list seems to have successfully pushed Barnes & Noble (NYSE:BKS) shares higher on Monday, arguing that the company was undervalued and well positioned for a move next year. The stock rose 7% over the course of the day. That's not an insubstantial move, so it's easy to see how an outsider might think, "Hey, those guys just said something and pushed that stock up. Maybe they're pocketing a profit."
Fair enough. Let's look at the list and see which other companies experienced a big move... None of them. Western Digital (NASDAQ:WDC) was the second-biggest gainer, up 2.3%. Two of the stocks actually lost value on the day.
So let's play devil's advocate and think about what News Corp. would have had to do in order to make some money. For the sake of argument, let's arbitrarily say that after an acceptable period of time, Barnes & Noble is up 10%, four of the stocks are up 5%, four are unmoved, and one drops 5%.
So News Corp. buys the stocks before the announcement, makes the announcement, and then holds on for a week to turn their profit. Of course, if you want to move the market, you need to weigh the risks that go along with doing so in order to figure out how much to invest -- no one robs a bank trying to get $3.50.
Luckily for our theoretical fraudster, the SEC has had a hard time prosecuting people for "pump and dump" scenarios. And recent efforts have focused on penny stocks, not the big boys that most people seem to think are the target of these media-led campaigns. The settlements that the SEC reaches seem to be a fraction of the gains made, so maybe the risk isn't that high.
So let's just try to add some money to the top line. The risk seems slim, the rewards could be huge, and all we have to do is convince 100 or so people to ignore their journalistic integrity, break a few federal laws, and look the other way so that we can make a bit more money in a venture that's not part of our core business. How hard could that be?
So again, let's arbitrarily decide that we want to add 0.5% to one quarter's income, which is meaningful, but not so much that people would suddenly get suspicious. For News Corp., that means making a mere $41 million on this trade. So working backward, how much stock do we need to buy before we put out this article? Well, there's a bit more math than normal involved, but here are the important points.
- We need to buy a roughly equal value of each stock ahead of time for our basket, because we don't know which ones are going to pop. Using Apple as the baseline because its share price is the highest, we'll buy one share of Apple, and then spend roughly $500 buying whole shares of the other companies in the list. The total basket costs about $4,900.
- Each instance gives us $125 in income for our $4,900 investment.
- To make our $41 million, we need to buy the basket 330,000 times.
- That would require an outlay of $1.6 billion.
What a great plan! We end up with 12.2 million shares of Barnes & Noble, which would give us about as many shares as the top four institutional holders all put together, and require that we announce our purchase to the SEC.
So to make any meaningful money, it looks like we would need to invest a ludicrously large sum of cash, break a half-dozen SEC rules, bribe a huge swath of employees and traders, get lucky on stock movements, and somehow avoid detection even though we're the trading equivalent of a live llama at a dinner party. That just isn't going to happen.
I don't think News Corp. is trying to manipulate the market for financial gain. No major publication is, and no sane blogger would. As it turns out, the reason the stock market is at all stable is that there are all kinds of barriers in the way to stop people from moving the market. The only dangerous ground we tread on is in the land of penny stocks. As fellow Fool Morgan Housel recently wrote, "Time-saving tip: Instead of trading penny stocks, just light your money on fire." Check out his 50 Unfortunate Truths About Investing for 49 more little insights, and don't worry, he's not trying to move the market.
Fool contributor Andrew Marder has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Western Digital. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.