Internet Investment Advice: Investing with a Rock of Salt

Posted: 29 Jan 2004

See all articles by Michaël Dewally

Michaël Dewally

Towson University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Abstract

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

Suggested Citation

Dewally, Michaël, Internet Investment Advice: Investing with a Rock of Salt. Financial Analysts Journal, Vol. 59, No. 4, pp. 65-77, July/August 2003. Available at SSRN: https://ssrn.com/abstract=490802

Michaël Dewally (Contact Author)

Towson University - Department of Finance ( email )

8000 York Road
Suite 316 L
Baltimore, MD 21252-0001
United States
410-704-4902 (Phone)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
864
PlumX Metrics