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The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails by Steven M. Sears

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Words Are Weapons

The reflex to buy stocks at the wrong time for the wrong reason is well understood by seasoned investors. They use it to their advantage. They use it to minimize their own market mistakes. They use it to pawn off their bad investments to people who don’t know any better. One of the most frequent tricks is rumortrage, a ruse that coincides with the rise of the Internet and inexpensive trading commissions. Rumortrage lets sophisticated investors buy low and sell high. To do this, they start a takeover rumor. This is surprisingly easy to do, and it is irresistible to naive investors. The chance to buy stock in a real takeover target is like winning the lottery on Wall Street because the acquiring company typically pays a premium price. Financial news organizations should be sophisticated enough to quash the rumor, but rumortrage takes advantage of the mechanics of the news business. No news organization wants to be scooped by competitors. A takeover scoop is a major win. Reporters know this, and so do rumortragers who insure that their hustle has several ingredients that satisfy legitimate news standards: unusual trading volume in the options and stock market, the requisite “no comment” on market speculation from the “takeover target,” and at least one, but preferably two, people, often traders, who acknowledge the rumor’s existence. Ideally, the rumor-stock occurs in a sector in which there was a recent merger. In such sectors, it is commonly understood that other ...

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