I mentioned in an earlier blog that I receive "penny stock tips" into my anonymous Hotmail (now called "Outlook") account as a form of guilty pleasure, a reverse Schadenfreude that is actually quite educational in terms of deciphering the language of financial marketing. A surprising number of people are swayed by the promises of easy money and instant wealth creation, which in many ways is understandable but this then leads to the problematic situation of enabling con artists to find relatively easy prey.
I sympathize with those that have ever lost money to any kind of scam. Regardless of one's intellect, anyone that happens to let their guard down at an inopportune moment can be victimized. It's an ongoing dilemma that will not end until humanity ceases to exist. But for myself, I can't help but find the penny stock scam to be laughable!
It goes something like this : you get an email "alerting" you that so-and-so company is the "top pick" of the day, week, month, whatever. When you open it (because hey, that's what you do!), you are let in on a "secret" that apparently no one else in the world knows about except the tip "alerter" (and his vast army of subscribers...). Paragraph after paragraph is devoted to information about the industry that the company is associated with, and how competitors in the past have done extraordinarily well (how would you like to go back in time and buy Apple shares at 15-cents a pop?), with the not-so-hidden implication being that investing in the "secret company" will yield the same results.
However, very little, if any information, is devoted to the "secret company" itself. And no wonder! First of all, it's advertised as a secret, so information regarding it must logically be secretive as well. Second and more to the point, penny stock companies, or companies whose equity shares are traded in the Over-The-Counter (OTC) markets, have little in the way of financial statements or other public disclosures. They exist, of course, but getting to them may require a lot of work, often times forcing you to contact their investor relations office.
For this, and many other reasons, investing in penny stocks based on someone else's whim is a bad idea. Note that I did not say investing in penny stocks is a bad idea : they can offer powerful leverage but you must invest with the right intention and the right information. Anything less is akin to financial suicide due to their thin liquidity and extreme range of volatility.
A funny exercise is to objectively examine the penny stock pumpers record. My favorite pumper, a person I will not name, has had a very bad go at it for month of March. Here are his streak of absolute doozies!
PLPL - alert issued March 4 (-15% loss)
GASE - alert issued March 9 (-16.3% loss)
TNKE - alert issued March 11 (-47.5% loss!?)
DKAM - alert issued March 13 (-5% loss)
ENDO - alert issued March 16 (-10.8% loss)
RBIZ - alert issued March 18 (-11.8% loss)
OGNG - alert issued March 20 (+5.9% gain)
GEFI - alert issued March 24 (-7.7% loss)
WBXU - alert issued March 25 (the jury's still out but it don't look good...)
Out of 8 picks not including WBXU, only one turned profitable, with the average percentage loss being -13.52%! Unfortunately for any investors that may have followed this stock pumper's advice, all of the losing picks exhibited clear signs of trouble, yet people continue for some strange reason to flock to these so-called oracles, only to be fleeced time and time again.
It may be a sign of things to come : we are a nation addicted to optimism regardless of its foundations. Over the next few weeks, financial pundits will continue to push other people's money into the large cap equity funds while quietly pulling out theirs. Facts may not matter at this point, adding even more reasons why investors need to be absolutely careful heading into the second quarter of the year.