In this day and age of supposed stock regulation and protecting the general public from investment scams I though I would write a post on something that really ticks me off…..Penny Stocks newsletters. I recently got a newsletter in the mail that was a very fancy newsletter discussing a penny stock that they state
“I now predict a profit of $243,345 on every $5,000 on this 80 cent Stock.”
In fact, I was so shocked to see a newsletter that could make such exaggerated claims that I took a picture of it and posted it below (I covered up the stock name)
When I used to work in the investment industry our analysts would never dare to put out such outlandish predictions and this is a perfect example of how unregulated and manipulated the penny stock market is.
No real fund manager is going to buy junky stocks under $1.00 a share and Investors Business Daily who has one one of the most comprehensive databases of historical stock prices and stock fundamentals has shown that the biggest performing stocks aren’t penny stocks (usually the big money managers don’t touch stocks under $10).
In fact one of the most successful penny stock service (from Timothy Sykes) that I am aware off makes their gains on shorting these penny stocks when they put out hyped up marketing like the picture I have shown.
The most shocking thing about these penny stock newsletters(advertisements) is that they usually have some shocking stuff in the fine print. This one is filled with pages of hype but in the tiny fine print they state that they got paid to put out this newsletter and the person who paid for it is an Investment firm that bought up 1 million shares of this stock and this newsletter is to provide public awareness for this stock.
Also in the fine print it says this research company has received $1,980,000 as a production budget for this newsletter and marketing of this stock and that they make no warranties as to the accuracy of the information in this newsletter.
CAN YOU BELIEVE THIS IS LEGAL ?
Penny stocks newsletters and investment pick services are geared at preying on small investors that are trying to chase the lottery. Most of these penny stocks are not well regulated and are listed on less regulated exchanges. These penny stocks usually crash as hard as they rise. In fact look at the chart of the stock mentioned in this newsletter.
From the recent volume in the chart, either someone is buying it ahead of the hype from this $2million marketing campaign or they are unloading the stock onto unsuspecting buyers that are buying it from reading this marketing newsletter.
Can this stock go from $0.80cents a share to $44.28 a share like claimed in the newsletter ? I doubt it and I have seen so much hype and “story stocks” based on future forecasts that I don’t listen to hype.
I was in the investment industry during the dot com bubble and I can recall so many hyped up stories of why a stock deserved 200x price to revenue multiple with no earnings yet. I especially remember all the excitement about 3G wireless networks being the holy grail (that was 10years early). Remember Nortel ? oops….
Anyways, the point of this post is to reiterate that you you need to put on your investing blinders and don’t pay attention to hype, stock chat rooms, and magazine articles. I honestly am surprised how a newsletter can legally make such exaggerated claims in this day and age but this stuff is still out there. Penny stock pump and dump are still very prevalent. While there might be a couple companies that are penny stocks that become big winners, I would rather pay up a little more after the stock has proven itself than try to make big bets on penny stocks that can be manipulated with little regulation, no institutional investors, illiquid volume, and wide bid/ask spreads. Some investors do make money trading penny stocks based simply off of chart patterns I would rather just do options with the same amount of capital where I can have liquidity to exit positions easily and controlled risk. Please comment below. I would love to hear any readers experience with penny stocks or your thoughts on this.