Internet Investment Advice: Investing with a Rock of Salt
Posted: 29 Jan 2004
To investigate the origin and quality of investment advice on the Internet, I collected and categorized the stock recommendations (buy, sell, and neutral) distributed on major newsgroups (online discussion groups) for April 1999 and February 2001 and examined the return characteristics of the recommended stocks. I found, first, that Internet stock recommendations are overwhelmingly positive, with a ratio of buy advice to sell advice greater than 7:1. Moreover, most advisors on the Internet follow a momentum strategy: They recommend stocks after the stocks have experienced sharp price increases. In addition, the stock market does not appear to react to these recommendations. I found the two-day cumulative abnormal returns to be mostly insignificant, regardless of the recommendation characteristics. The longer-horizon returns are not significantly above the market's corresponding performance. In summary, I found no evidence that any new information is exchanged in these forums; the recommendations have no informational value. The fears raised by the media about the destabilizing power of such traders who participate in these discussions are thus groundless.
Keywords: Portfolio Management: equity strategies; Equity Investments: research resources; Equity Investments: technical analysis
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