Temporary riches

The story of an unintentional stock pump

“So his father is in Asia… apparently signing a massive deal over there. Don’t tell anyone! This is inside info!”

My heart raced and I gripped the phone receiver a bit tighter.

“What’s the stock at? Has it moved?”

“Nope. Still at 20 cents. Hasn’t moved in weeks.”

“Tomorrow… we buy.”

It was the early 90’s. As business students, we all followed the market to some degree. I was a stock market nerd, having started actively investing as soon as I was old enough to open a brokerage account. And a friend had a stock tip that promised to make us all rich overnight.

Truth be told, we didn’t have a lot of money to gamble. A few thousand dollars here or there. The penny stock was easy to buy… with our bids being easily absorbed by the market.

Word started to spread. The stock began to inch up, first hitting 25 cents… then 30… when it hit 40 cents the early investors celebrated a double.

Of course, this soon became the worst kept secret in the faculty. It didn’t take long for the stock tip to find its way to our parents, encouraging them to sink even larger sums into the stock.

Over the course of a few weeks, the stock continued to run. I don’t recall where it peaked, but it was well over a dollar. We were all counting our riches. Of course, nobody sold a share. This thing was going to 20 bucks, we were sure of it. Nothing like an easy 100x to get a head start on your investing journey.

And then… for no reason at all… the stock began to fall.

“What is happening?”

“I heard there’s a delay in signing the contract.”

“I’m sure it will get signed soon.”

“Good opportunity to buy more before it goes up again.”

These were the days before internet message boards. The “pump” was entirely conducted via telephone calls and whispered conversations.

“My dad is pissed. I told him to hold on. It’ll go back up. You’re sure about this, right?”

The weeks turned to months, and the stock price sunk each day… finally settling at the long term equilibrium price… of 20 cents. A pure round trip for many of us, but a huge loss for others. And there it remained… for the better part of the next two decades.

It’s only with hindsight that I realized what actually happened. There was no news of any significance. The contract was irrelevant, as was our “inside information.” This was just a bunch of kids spreading a rumour, bidding up the price of an illiquid penny stock, and then, when the last buyer bought, and there were no more people to whisper the secret to, the buying ended, and the stock fell back down to earth. The upward momentum simply ran out of gas when there was nobody left to buy.

This is how me and my friends caused a stock to rise, and fall. This is how we became temporarily wealthy. It was fun while it lasted, I guess. But for me, it was a critical lesson in what happens when a mania feeds on itself to create upward momentum in the price of an asset… and what happens when that momentum fades.

The internet adds fuel to the fire, enabling a global reach, pumping assets worth billions of dollars. Look no further than the recent “meme stock” episode, with worthless companies like GameStop being bid up to ridiculous heights (I just checked, and yep, it’s still holding on). The fact that the pump happens on such a large scale can serve to obscure the fact that the principle is exactly the same as what happened to our miserable little penny stock.

In completely unrelated news, the Bitcoin price is knocking on $100k, up over 6x the low it reached just two years ago. It’s making a lot of people rich. I hope they remember to take some money off the table while they have a chance.