Video: Friedman: The media to blame for apple selloff.
This vides illustrate how the media can affect the investors. In this case, the largest in term of market cap and most traded company "Apple" is in the center of attention. On tuesday april 24, Apple is going to released its quarterly earnings and the speculation about are the numbers going to beat expectation started since couple of weeks already on the medias. That made the stock going to its all time high on april 10 2012 ($644), followed by a correction and went down 10% one week later on April 16 to $577, and went up again the day after on april 17th (5%) to make another correction of 3% on april 19th (See the chart bellow). This high volatility is due according to Friedman to the media, others would blame the high speed traders (See the CNBC's video of the April 19th (Video)
“The proposition that more information leads to better decision-making is intuitively appealing. But the truth of the proposition depends on the relevance of the information to the decision and on how well equipped the decision-maker is to use the information.” Brad M. Barber and Terrance Odean (2001) The Internet and the Investor.
Inexperienced investors have quick access to large amounts of investment information via the Internet on web sites such as Yahoo Finance, Motly Fool, or Bloomberg. Also, investors are now able to access millions of pieces of financial data. For example, an investor can download daily high, low, closing prices, volume, and returns data from Microsoft’s investor website (http://moneycentral.msn.com) for up to 10 years for all publicly traded stocks in the U.S. Assuming 10,000 publicly traded stocks with an average history of five years, these data alone represent 63 million bits of information. (Brad M. Barber and Terrance Odean (2001) The Internet and the Investor).
Thus, the Internet has a direct influence on the type of information the investors are going to focus on. Instead of looking for valuable information, they have the tendency to seek the less costly and the more readily available types of information.
Many recent academic articles have argued that after the increases in stock prices over the last decade, the expected equity premium is low and perhaps negative (Lee, Myers and Swaminathan, 1999; Fama and French, 2000; Shiller, 2000). In fact, inexperienced traders have transformed the stock market to what is called a speculative bubble. Shares of companies are not priced to the real value of the company but more on quantity of shares traded, driven by the news available online.
The case of 3Com and Palm is such an event
"On March 2, 2000, 3Com sold somewhat over 5 percent of the shares in its newly created Palm unit about 4 percent in an initial public offering and about 1 percent to a consortium of firms intending to distribute the remaining shares to 3Com shareholders later that year. Based on the number of shares outstanding, each share of 3Com included ownership of 1.5 shares of Palm. Yet on March 2, 3Com closed at $81.81 and Palm at $95.06. An investor who bought shares of Palm could have instead bought the same number of shares of 3Com for less money and ended up owning 1.5 times as large an interest in Palm plus an interest in 3Com’s non-Palm operations. To put the same point another way, at the close on March 2, the value of 3Com’s shares in Palm were approximately $51 billion, while the market value of 3Com’s equity including its shares in Palm was $28 billion. Either the market was valuing the non-Palm portions of 3Com at a negative $23 billion even though the non-Palm portions of 3Com had in November 1999 reported an operating income of about $750 million over the previous 18 months, or investors were seriously overpaying for Palm" (Lamont, 2000).
This is the perfect example of the saturation and volatility of information that lead to mis-procing and a speculative bubble. The large amount of information collected from many different sources lead to the uncertainty of the future value of the shares and to more cash invested than the share value.
“Speculative bubbles can also be manifestations of the “winner’s curse.” In auctions where bidders have different but unbiased beliefs about an object’s value, the high bidder is likely to be an individual whose initial estimate of value exceeds the object’s true value. The winner’s curse is more likely when there are more bidders, when the dispersion of opinions about the value of whatever is being auctioned is great, and when price is set primarily by those with the highest opinion of value.” (Thaler (1988) in this journal for an overview of the winner’s curse.).
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