"The Experienced Investors Who Think They Can Beat the Scam"

Not only beat the scam but also beat the scammers.

Crush them, without their realizing what happened.

Everybody needs a hobby.

From Harvard Business School's Working Knowledge, May 28: 

Pump-and-dump schemes hurt people who buy into them and can rattle markets. And yet, some speculative investors purposely seek out them out, says research by Eugene Soltes. What can regulators do? 

Many investors think they can outsmart the wolves of Wall Street, betting they can outmaneuver “pump-and-dump” schemes and bring home a windfall.

Rather than being lured into fraudulent trades, some investors seek out such schemes, according to research by Harvard Business School Professor Eugene Soltes and his coauthors. Their analysis of 470 pump-and-dump schemes finds that participants lose one-third of their investment, on average.

There’s a subset of people who are actually looking for pump-and-dumps.

“There’s a subset of people who are actually looking for pump-and-dumps,” says Soltes, the McLean Family Professor of Business Administration. “That was fairly provocative and surprising.”

Pump-and-dumps conjure images of inexperienced investors duped out of their life savings. On the contrary, Soltes’ research shows that many speculative traders seek out shady penny stocks—with some viewing warnings as buy signals—in search of a quick buck in a hot market.

“These investors appear to be quite similar to the risk-seeking traders that were fueling the recent surge in trading in speculative meme stocks,” write the authors of “Who Falls Prey to the Wolf of Wall Street Investor Participation in Market Manipulation,” published in the journal Management Science in November.

Soltes cowrote the paper with Christian Leuz and Maximilian Muhn of the University of Chicago’s Booth School of Business, Steffen Meyer of Denmark’s Aarhus University, and Andreas Hackethal of Goethe University in Frankfurt.

A tale as old as the Great Depression
Pump-and-dump promoters buy large amounts of inexpensive and often illiquid shares, and then distribute false information about the company unrelated to their fundamentals. The “tout”—often through email, newsletters, and online forums—sparks a buying spree.

However, because these stocks often have a limited number of shares to trade, prices spike. At some point, the promoters sell, reaping big profits, and other investors are left with losses.

The strategy, immortalized in films such as “The Wolf of Wall Street,” has been around since 1929, when such a scam helped set off the market crash that would spark the Great Depression.

Who are ‘tout’ investors?
Soltes and fellow researchers examined 470 allegedly illegal “tout” campaigns in Germany from 2002 to 2015, including those identified by the German Federal Financial Supervisory Authority (Bafin). They also analyzed 178 billion euros ($208 billion) of stock trades by 113,000 retail investors during that time as well as their demographics, data provided by a major German bank...

....MUCH MORE 

Also at HBS Working Knowledge

May 20 - If AI Knows Your Next Trade, What Happens to Money Managers?

To get a feel for the way it was done in one of the preeminent hives of scum and villainy (credit Obi-Wan Kenobi) we join our guide David Baines at The Vancouver Sun:

June 7, 2012 
Why We Love the Vancouver Business Scene (Frauds, Scams and Flim-flams)

February 4, 2013
Checking In On the Vancouver Business Scene

...That's it Dec. 5 to Feb. 4.

But, if one were to look at the November 2012 stories, you have the head of criminal investigations for the British Columbia Securities Commission getting fired, the former mutual fund salesman now selling bongs, the defrocked fund manager who, when ask about a Baines story on him responded...

June 21, 2014 
The Vancouver Sun's David Baines' Farewell to Readers

Leaving the life of frauds scams and flim-flams.
We missed it last year so I thought a one year anniversary adios to one of the best business journalists I've ever come across would be in order. He wrote about some of the scummiest denizens of one of the most wide-open markets in the world and despite the death threats and the lawyers and the diabolically ingenious corporate structures he got the story and as long-time readers of this blog know I have a weakness for tales of the knaves, varlets charlatans and outright frauds that populate the underbelly of the markets.
I think Baines does too....