Cash in on the power of the press

How do you find shares to ‘short’ in a financial crisis?

Simple! Just look at the companies the media is talking about.

‘Shorting’ means selling stocks you don’t own in the hope of buying them back later at a lower price, so bagging a profit. But it’s high risk - the shares you short could then rise, cleaning you out – so you need to be very clear about what to sell and what not to sell.

American University finance professor Robin Lumsdaine may have found the answer – by analysing companies’ press coverage. She has compared the Bloomberg readership stats on stories about 30 US banks with their stock performance from August 2007 to August 2008, the period when the credit crunch was really biting.

To measure media coverage, the Prof. tracked the ten banks which were most widely read about, according to Bloomberg’s New Readership Rankings list.

Take a look at the chart below. The top panel shows the percentage of days on which each firm made the NRR table. The bottom panel shows percentage changes in share prices for those banks shown by their stock ‘ticker’ codes.

 

It’s important to note that this doesn’t take account of whether the coverage was bullish or bearish (given the time period, it’s probably fair to assume a good chunk of it was very gloomy indeed). This is purely about which banks were drawing all the attention, rather than the tone of the articles.

“Firms whose news elicited higher readership suffered significantly lower returns than those that didn’t”, says Lumsdaine. By short-selling the ten stocks on the list each day, and owning the rest, you’d have made a 1.45% return for the period, said the study. Meanwhile the Standard & Poor’s 500 Financials Index fell 39%.

Very impressive. Of course, it’s one thing to unearth such results from ‘back-testing’ with the benefit of hindsight, it’s quite another to be able to produce something similar in the future.

But what it does help to confirm is a maxim in which I’ve always believed: you generally make more money investing in shares which are out of the spotlight, rather than those splattered all over newspapers’ front pages. Who said the press has no real power?

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