Holding Long Positions In 'Manipulated' Stocks Out Of Spite

Includes: LVLT, OSTK, SIRI
by: SA Editor Rocco Pendola

Bob: "What seems to be the problem?"

Jerry : "Well I want to return this jacket and she asked me why and I said for spite and now she won't take it back."

Bob: "That's true. You can't return an item based purely on spite."

Jerry:. "Well So fine then ... then I don't want it and then that's why I'm returning it"

Bob: "Well you already said spite so....'

Jerry: "But I changed my mind.."

Bob: "No...you said spite...Too late."

Investors love to cry "manipulation" when their favorite stock trades down. Of course, considerable danger exists in allowing a stock to become your "favorite" in the first place. That's one of the first signs of an emotional attachment that can lead to unforced investing errors. Once you pick sides in the battle running around inside your head, rational thought goes out the window. The same type of psychological process keeps Vegas in business.

Three stocks tend to draw the ire of otherwise sane people who often morph into obsessed conspiracy theorists: Sirius XM (NASDAQ:SIRI), Level 3 Communications (NASDAQ:LVLT) and Overstock.com (NASDAQ:OSTK).

Consider some of the comments that followers of these stocks make on Seeking Alpha articles as well as the Yahoo Finance message boards. Note how "googling" or other people's "posts" become the centerpiece of the "research" that uncovers the "manipulation."

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To be clear, I am not claiming that stock market manipulation does not exist. I am simply saying (A) It's not the reason why your stock flounders, the underlying company is, and (B) If you really believe somebody is trying to keep your stock down, is it sensible to cling to a long position and "buy on the dips?"

If you think unsavory groups are manipulating a stock, why on earth would you stay long? Most answers to this query stink of emotional attachment.

Holding the position often becomes a battle between good and evil. The stockholder mistakenly equates his/her long position in the presumably manipulated stock as a show of force against the evildoers. It's really all very Bushian. The fairy tale notion that, eventually, good always triumphs over evil clouds the mind. In essence, an investor not only keeps a long position in the stock he/she thinks evil forces manipulate, but that person holds that position out of spite; in defiance or contempt of market makers, hedge funds, high-frequency traders, short sellers and other perceived economic terrorists.

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That's from SIRI's Yahoo Finance message board, dated May 19, 2011 when the stock closed at $2.23. That's a recipe for disaster or at least losing or not making much money. And it begs another question, who's manipulating who?

In another Seeking Alpha article that essentially discusses how to pick your spots when you have limited funds, a commenter made an excellent post that's relevant here:

And that's what it comes down to. Why tie up capital in a stock that the big boys own? It's really a waste of time going up against such a concerted and corrupt, yet incredibly powerful effort, is it not? If you want to fight the good fight by emailing your representatives, marching on Washington, occupying Wall Street or filming a documentary, go for it. I'm all for activism, even if I don't see eye-to-eye with the activists. I think it's good for society. But, do yourself a favor, don't consider holding the stock in question some show of force, loyalty or solidarity.

So, the question becomes not one of whether or not manipulation takes place, but should you fight it with a long position in a stock you think the big boys can game with the push of a button? I would view with skepticism any person, especially if they're essentially anonymous, who asks you to join that fight.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.