The Zombie Dancers

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Finance Expert: Why 'Zombie' Stocks Don't Spook Some Traders
Fri Oct 23, 2009 5:20pm EDT--------------------Thanks eet2


WINSTON-SALEM, N.C., Oct. 23 /PRNewswire-USNewswire/ -- Two weeks before
Halloween, the Securities and Exchange Commission again warned investors
against buying shares of bankrupt companies, but like those creatures in
horror films that rise from the dead, so-called "zombie" stocks--shares of
companies that failed during the financial crisis--are still on the march.


Take, for example, Washington Mutual and Lehman Brothers. At the end of last
year, their stocks traded at 2 cents and 3 cents per share, respectively. With
no future earnings in sight, shares of Washington Mutual recently traded
around 20 cents, and Lehman Brothers shares have hovered around 15
cents--spectacular gains fueled by what many consider nothing more than
gambling.


Critics have called on the SEC to halt the trading of such stocks to protect
unsophisticated investors who might be lured into unwise trades. But Lecturer
of Finance Sherry Jarrell, who teaches a graduate-level class on investments
and portfolio management in the Wake Forest University Schools of Business,
disagrees.


While Jarrell doesn't think investing in zombie stocks is a sure-fire
profitable strategy, she doesn't consider it gambling either, because there is
an expectation of gain. Jarrell also doesn't believe those who are trading
zombie stocks are ignorant or unsophisticated. "To outlaw these stocks means
that you've truncated an avenue for people to express their different risk
preferences," Jarrell says. "If someone wants to go on that haunted trail, let
them. It's not like they're taking advantage of people on the other side of
the trade."


Washington Mutual and Lehman Brothers lost their standing to be listed on
stock exchanges, so traders have to keep up with prices through a quotation
service known as the Over the Counter Bulletin Board, which unsophisticated
investors are unlikely to access. Other troubled companies, such as Fannie
Mae, Freddie Mac and AIG, whose shares are widely considered to be zombie
stocks, are still listed on major exchanges. The federal government's own
backing of those companies weakens any argument against allowing individuals
to invest in them, if they dare.


One project Jarrell assigns her students is to identify a publicly traded
stock they believe the market has significantly mispriced. By definition, she
says, the exercise requires the same calculation made by traders of zombie
stocks--reaching a different conclusion about a stock's future cash flows and
risks than that of the market.


Jarrell points out that all investments carry a degree of risk proportional to
potential returns, and investors have varying tolerances for risk. Some hide
from risk; others seek it out. She recalls a study some years ago that found
striking similarities in the blood chemistry of day traders on Wall Street and
jet fighter pilots. "It turns out they need a certain amount of danger to feel
normal," Jarrell says. "They seek risk in order to feel comfortable."


Jarrell blogs about finance and economic issues at www.sherryjarrell.com.


This news release was issued on behalf of Newswise(TM). For more information,
visit http://www.newswise.com.








SOURCE Wake Forest University

Eric F. Frazier of Wake Forest University, [phone], [e-mail]