Riding a pump and dump

[ushdadude]

This may be completely skewed thinking so let me know.
I'm reading about the dangers of falling for a pump and dump scheme. Basically someone hawks a specific stock to artificially inflate the price and then sells his shares. They say the average inflated price only lasts for about two days and then comes crashing back down. The people left holding the shares end up losing out. So....What if you here about a pump and dump and cash out a day after buying in; or if you are at the peek, selling short? Does this make any sense at all? Any legal ramifications?

 

[Morris]

While it makes sense in theory, attempting to cash out before the stock crashes, or trying to short the stock near the top is easier said then done. Not to mention that pump and dumps are notoriously difficult to short as shares are generally not available.

 

[Matt]

Clever ideas often fail... I had a beauty of an idea that I tried along these lines: Short a stock on the day it kicked off a fixed dividend, knowing for sure that the intrinsic value would drop proportionally. I picked up the cash, slapped myself on the back, then got a bill for the $1000 dividend payment due....

Not quite the same thing, but just pointing out if you have thought of it, likely others have too, and they are waiting for you to do what I did and throw some money down.

 

[scw]

If you can ride a pump and dump on the way up consistently you'd probably be a great trader and better off trading full time. With regards to shorting pump and dumps, often the transaction costs and cost to borrow will really hurt your wallet (from what I've heard). IMO, the best thing with identifying a pump and dump is you can avoid them and warn your friends/family to do the same.

 

[ushdadude]

I'm not necessarily talking about penny-stocks which are often the target of these schemes. From my understanding, there are legitimate analysts who hawk real stocks in legit magazines or shows and the public reaction is to buy. But since the price is artificially inflated, it corrects itself fairly quickly. So my plan would be to buy these magazines the day they come out and go along for the ride.

 

[Ja350z]

I'm not necessarily talking about penny-stocks which are often the target of these schemes. From my understanding, there are legitimate analysts who hawk real stocks in legit magazines or shows and the public reaction is to buy. But since the price is artificially inflated, it corrects itself fairly quickly. So my plan would be to buy these magazines the day they come out and go along for the ride.

The market is a fickle beast. I hope the irony isn't lost in referencing "legitimate analysts" who pump & dump stocks.
IMO nothing trumps due diligence & technical analysis. Determine your financial goals, construct an investment approach, & stick to it!
I have gotten lucky in the past "going along for the ride"...rarely though. I prefer more of a "captains seat" with my investments, not to say "rides" haven't made people millions. Just be prepared to get off the ride with nothing.
Best of luck though, if you're on to something...then go get it!

 

[Annie H.]

I'm not necessarily talking about penny-stocks which are often the target of these schemes. From my understanding, there are legitimate analysts who hawk real stocks in legit magazines or shows and the public reaction is to buy. But since the price is artificially inflated, it corrects itself fairly quickly. So my plan would be to buy these magazines the day they come out and go along for the ride.

The rule of thumb I've *always* heard is that if you've heard about it, it's way too late, it's common knowledge. Magazines have weeks, if not months of lead time. It does NOT work. You've got a better chance--still iffy-buying stocks that have announced a plan to split.

 

[Annie H.]

OP--I no longer actively trade --except for a small amount of "fun" money and ETFs- although I did in the past during several extended bull markets when it was sometimes described as shooting fish in a barrel, especially for momentum trading. If you are truly interested in actively trading you need to educate yourself especially with regard to technical analysis and momentum trading. There are no "easy" ways to profit and compared to MS you need a lot more education.

Take a look at this website I just found to see what some folks do:
http://stocktwits.com/symbol/XLV

A good place to educate yourself is Investors Business Daily. They have forums, local clubs and a system called CANSLIM:
http://www.investors.com/default.htm

That said, I strongly support Index Funds (or ETFs, SPDRs, etc) as the primary way to invest.

 

[scw]

OP--I no longer actively trade --except for a small amount of "fun" money and ETFs- although I did in the past during several extended bull markets when it was sometimes described as shooting fish in a barrel, especially for momentum trading. If you are truly interested in actively trading you need to educate yourself especially with regard to technical analysis and momentum trading. There are no "easy" ways to profit and compared to MS you need a lot more education.

Take a look at this website I just found to see what some folks do:
http://stocktwits.com/symbol/XLV

A good place to educate yourself is Investors Business Daily. They have forums, local clubs and a system called CANSLIM:
http://www.investors.com/default.htm

That said, I strongly support Index Funds (or ETFs, SPDRs, etc) as the primary way to invest.

This is all good advice. Another thing is to identify where you may have an advantage over traditional institutional investors. Likely smaller cap companies, highly illiquid positions, long holding times are all potentially advantages you have over those managing 100 millions. Some of my highest annualized returns historically were in areas where my small portfolio size was actually an advantage (unfortunately this works both ways since I couldn't scale up to fully invest my portfolio either).

 

[Someone]

Clever ideas often fail... I had a beauty of an idea that I tried along these lines: Short a stock on the day it kicked off a fixed dividend, knowing for sure that the intrinsic value would drop proportionally. I picked up the cash, slapped myself on the back, then got a bill for the $1000 dividend payment due....

Not quite the same thing, but just pointing out if you have thought of it, likely others have too, and they are waiting for you to do what I did and throw some money down.

Matt, you *can* play the ex-dividend drops. You have to find a stock that tends to over-react to the dividend, short at the open on the ex-dividend date, then cover when you're comfortable. It's not huge money but can be predictable.

 

[Matt]

Matt, you *can* play the ex-dividend drops. You have to find a stock that tends to over-react to the dividend, short at the open on the ex-dividend date, then cover when you're comfortable. It's not huge money but can be predictable.

I'm saying you can't- because the dividend variable within that gets baked back in, but if you think the extra momentum from that is possible, you might have a point, but it's not one I would personally play with. Interesting concept though.

 

[Annie H.]

Some of my highest annualized returns historically were in areas where my small portfolio size was actually an advantage (unfortunately this works both ways) since I couldn't scale up to fully invest my portfolio either).

Hopefully you've learned --- FLASH BOYS
http://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393244660/ref=zg_bs_tab_pd_mg_2

 

[derek]

Between the risk, timing, and short term capital gains tax, I believe holding long in a financially sound company will trump day trading or schemes every time. This isn't the 90s

 

[El Ingeniero]

First rule of investing is, don't lose money, because the bigger your drawdown, the better your subsequent investment performance has to be to get back to square 1.

Second rule of investing is, don't anchor on flashy returns from the market darling du jour. Just because the US stock market has risen like 30% in the last year, doesn't mean you shouldn't be ecstatic with returns between 5% and 15% every year. In general, the only people who need to beat the S&P 500, are fund managers.

Third rule of investing is, do not put all your eggs in one basket. Damn near every asset class is represented by an index fund or ETF. Do a google search on 'Ivy Portfolio', 'All Weather Portfolio' and 'Permanent Portfolio'. These are all good examples of portfolios designed such that drops in one asset class are more than offset by gains on other asset classes. You will never see 30% annual gains with these portfolios, but you will sleep at night.