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Wednesday, July 15, 2015

Mark Hulbert - Opinion: Why the Twitter hoax suggests the stock market is near a top

CHAPEL HILL, N.C. (MarketWatch) — The Twitter takeover hoax this week is indicative of an overvalued stock market.

That’s because investors are increasingly resorting to betting on rumors as they become unable to find stocks that represent genuine long-term value.

In Twitter’s TWTR, +2.63% case, all that was needed to cause investors to “jump first and ask questions later” was the mere mention that the company was working with its bankers to evaluate a takeover bid.

Investors collectively responded by betting that the social-media company was worth nearly $2 billion more than it had been a few minutes previously.

That is the opposite of value investing. Investors’ behavior is actually more reminiscent of what Charles MacKay describes in his classic book, “Extraordinary Popular Delusions and the Madness of Crowds.”

And don’t think Twitter is an isolated case.

Just take those annoying spam emails that promise a fortune in some penny stock. Believe it or not, researchers have found a large number of investors actually follow the recommendations contained in the spam. One study by Laura Frieder of Purdue University and Jonathan Zittrain of Harvard University, found that the stocks mentioned in those otherwise annoying emails experienced a huge price increase, as well as a big jump in volume, after the messages were sent.

Clearly, investors’ skepticism is being trumped by an eagerness to believe. As Zittrain told me: “Greed all too easily colors our objectivity,” and this is true for all types of investors.

It reminds me of a joke: An oil man dies and, upon ascending to the Pearly Gates, is told by St. Peter that, while he deserves to get into Heaven, he can’t enter because there already are too many oil men. The recently deceased asks St. Peter for an opportunity to have a minute to talk to those other oil men and wonders if he can persuade them to leave.

St. Peter says sure.

A minute or two later, there is a stampede of oil men away from Heaven. St. Peter, amazed, asked what the oil man’s trick was. It was easy, he said: He simply announced that oil had been discovered in Hell.

However, the oil man declined the promised invitation to enter Heaven, and instead began following the stampede. Why, St. Peter asked?

Because, the oil man responded, you never know — the rumor about oil in Hell just might be true.

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