By: Dividend Sensei
I recently read about a German study of “pump and dump” penny stock scams that showed something that initially appears surprising, but isn’t once you think about it. The study was conducted by a group of economists at: the University of Chicago’s Booth School of Business, Leibniz University, Humboldt University of Berlin’s, Harvard, and Goethe University of Frankfurt.
The study looked at German stock scams in which a recipient gets an email proclaiming the “next hot stock”, one that set to soar into the stratosphere. The problem is that most of these stocks are penny stocks, meaning very lightly traded nano caps (under $100 million market cap) that are being pushed by scammers. These con artists will buy a large position ahead of time, then mass email thousands, or even millions of people, claiming to be offering a hot tip about the next can’t miss jackpot investment.
The reason that the scammers select these stocks is because they are so tiny. So even if just a fraction of email recipients buy it, the price will soar, sometimes several hundred percent. This allows the scammers to dump the stock and reap a massive profit. Of course this then causes the share price to implode, costing the victims of these scams a large sum of money (average loss 28%).
The researchers assumed that most people ignore such emails, and that the vast majority of these victims would be younger the kinds who are more likely to gamble on a high-risk/high-reward situation. However after analyzing 421 such scams from 2002 to 2015, which involved 110,000 investors, what they actually found, was that a surprisingly large amount of people (6%) fall for them.
Retirees are no less likely to become victimes of these scams than most people. What’s worse? The average amount of their portfolios investors risked was a shockingly high 11%. Even more horrifying? Most victims of such scams participated more than once. And worse still when asked if they were aware of the super high risk nature of these scams, which are all but guaranteed to lose you money, most people responded “yes”.
The conclusion the researchers drew is that even educated investors aren’t necessarily safer, or better investors. Human nature, specifically the inability to control emotions such as greed, simply means that most people are susceptible to making very foolish investment decisions. Or to put another way, even conservative retirees are an easy mark for con artists.