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I haven’t written about promoted penny stocks in a long time. Tonight I am not writing about promoted stocks, only penny stocks as promoted by a newsletter writer. He profits from the newsletter. Ostensibly, he does not front-run his readers.
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Before we go on, let me run the promoted stocks scoreboard:
|Ticker||Date of Article||Price @ Article||Price @ 12/1/15||Decline||Annualized||Dead?|
If you want to lose money, it is hard to do it more consistently than this. No winners out of 31, and only one company looks legit at all — Barfresh.
But what of the newsletter writer? He seems to have a couple of stylized facts that are misapplied.
- Every day, around 45 stocks double or more in price.
- Some wealthy investors have bought stocks like these.
- Wall Street firms own these stocks but never recommend them to ordinary individuals
- The media censors price information about these stocks so you never hear about them
Penny Stocks – Every day, around 45 stocks double or more in price.
That may be true, but most of those that do double or more in price don’t do so for fundamental reasons; they are often manipulated. Second, the stocks that do double in price can’t be found in advance — i.e., picking the day that the price will explode. Third, the prices more often fall hard for these tiny stocks. Of the 30 stocks mentioned above that were not dead at the time of the last article, 10 fell more than 90% over the 10+ month period. 13 fell less than 90%, 1 broke even, and 7 rose in price. The median stock fell 61%. This was during a bull market.
Now you might say, “Wait, these are promoted stocks, of course they fell.” Only the last one was being actively promoted, so that’s not the answer.
My fourth point is for the few that rise a lot, you can’t invest in them. The stocks that double or more in a day tend to be the smallest of the stocks. Two of the 30 stocks listed in the scoreboard rose 900% and 7100% in the 10+ month period since my last article. How much could you have invested in those stocks? You could have bought both companies for a little more than $10,000 each. Anyone waving even a couple hundred bucks could make either stock fly.
So, no, these stocks aren’t a road to riches. Now the ad has stories as to how much money people made at some point buying the penny stocks. The odds of stringing several of these successful purchases in succession, parlaying the money into bigger and bigger stocks that double is remote at best, and your odds of losing a lot of it is high.
This idea is a less classy version of the idea promoted in the book 100 to 1 in the Stock Market. If it is difficult to find the 100-baggers 30 years in advance, it is more difficult to find a stock that is going to double or more tomorrow, much less a bunch of them in succession. You may as well go to Vegas and bet it all on Double Zero on the roulette wheel four times in a row. The odds are about that bad, as trying to get rich buying penny stocks.
The ad also lists three stock that at some point fit his paradigm — MeetMe [MEET], PlasmaTech Biopharmaceuticals, Inc. (PTBI) which is now called Abeona Therapeutics Inc. (ABEO), and Organovo (ONVO). All of these are money-losing companies (MeetMe may be breaking into profitability now) that have survived by selling shares to raise cash. The stocks have generally been poor. Have they had volatile days where the price doubled? At some point, probably, but who could have picked the date in advance, and found liquidity to do a quick in-and-out trade?
The author lists five future situations as a “come on” to get people to subscribe. I find them dubious.
As for wealthy investors, he mentions two: Icahn pulling of a short squeeze on Voltari (difficult to generalize from), and Soros with PlasmaTech Biopharmaceuticals, Inc. It should be noted that Soros has a big portfolio with many stocks, and that position was far less than 1% of his assets. In general, the wealthy do not buy penny stocks.
As for brokers and the media not mentioning penny stocks, that is being responsible. The brokers could get in hot water for recommending or buying penny stocks even under a weak suitability standard. The media also does not want to be blamed for inciting destructive speculation. Retail investors lose enough money through uninformed trading, why encourage them to do it where fundamentals are typically quite poor.
I’ve written two other pieces on less liquid stocks to try to explain the market better: On Penny Stocks and Good Over-the-Counter “Pink” Stocks. It’s not as if there isn’t value in some of the stocks that “fly under the radar.” That said, you have to be extra careful.
Near the end of the ad, the writer describes how he is being extra careful also. Many of his rules make a lot of sense. That said, following those rules will get you boring companies that won’t double or more in a day. And that’s not a bad thing. Most significant money is made slowly — it doesn’t come in a year, much less in a day.
That said, I recommend against the newsletter because of the way that it tries to attract people. The rhetoric is over the top, and appeals to those who sense conspiracies keeping them from riches, so join my club where I hand out my secret knowledge so you can benefit.
In summary, as a first approximation, don’t invest in penny stocks. The odds are against you. Fools rush in where angels fear to tread. Don’t let greed get the better of you — after all, what is being illustrated is an illusion that retail investors can’t generally achieve.