rumors, stories and “hot tips” on Wall Street

I spent about half of my time during my professional career studying Wall Street and most of the rest looking at foreign, mostly Pacific Basin, stock markets.  In both arenas, you’d invariably hear a ton of gossip, stories, rumors that purported to contain information bearing on publicly traded companies.  But what to make of them?

As I gained experience in foreign markets, I began to realize that a good percentage of the rumors and stories I heard turned out to be true.  Of course, by the time they came to me they typically suffered from the effects of oral transmission of any message through several parties–the truth was all jumbled up.  Company X might not want to buy a smaller rival; it might want to sell a division to the competitor.  Earnings might not be surprisingly good; they might be unbelievably awful.

Yes, there was chaff.  But my picture was that in countries where the financial press isn’t well-developed and where analysts and portfolio managers would, in baseball terms, generally be regarded as low minor leaguers, the companies themselves would start the rumors.  They’d grab an analyst by the lapels and yell the information they wanted investors to know into his ears, hoping some of it would stick.  Sometimes it did.

The US is a different case.  In my experience, market rumors are virtually always deliberately deceptive.  And they’re spawned by someone who aims to gain a financial advantage from having them publicized and believed.  Listening to them isn’t necessarily harmful.  Acting on them invariably leads to heartache and financial loss.

I’m writing this because one of the more interesting stories floated in the US recently is that Microsoft was about to buy the Nook division of Barnes and Noble.  Publication of the report immediately shot BKS stock up by almost 30%.   Then the company reported earnings–and announced that it’s basically closing up shop with the Nook.  The stock dropped back to below the price it had been before the rumor came out.

Where did this rumor come from?

The newspapers said it originated from Microsoft itself.  An owner of BKS stock who wanted to sell?  …a disgruntled employee?  …a manager who was horrified that Steve Ballmer was on the acquisition trail again and hoped to embarrass him into not making an offer for Nook?   …some other bizarre facet of office politics?  Any of these is plausible.  But the most important point is that, like almost every other US rumor, no matter how detailed or plausible-sounding, this one turned out to be false.

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