Penny stock “tips”

I just got a comment from “goldguru” at the Gold Stock Bull Blog. My first thought was that he was pushing a particular penny stock as part of a “Pump and Dump” scheme… Reading his post, that seems not to be the case, but caution is warranted.  He says: As always, you should do your own due diligence, especially with bulletin board stocks that carry a higher risk profile.

  That’s good advice.  While he says he does not own any Nova, there are many others out there pushing stock they do own, and caution is always warranted. 

  It was recently shown that spammers are actually able to move the price of the penny stocks they push when they send out email about how this or that penny stock is about to “explode.”  The strategy is generally to load up on some ignored penny stock, send out a bunch of spams, and then sell as all the suckers buy.  This leaves the spammers with a tidy profit, and the suckers with stock that is more likely to implode.sc.png

Check out this chart of Petrosun Drilling.  On Aug 18 I received 3 spams from people pushing this stock, saying it was about to “explode” that same day.  If I had bought on that tip, I probably would have gotten in around $1.70.  The stock is currently trading at $.91, and never got that high in the meantime.  I think I also got a spam around Aug 30, where you see that secondary little peak, but I admit I wasn’t paying close attention.

This is why I seldom recommend stocks in my blog, and when I do it’s because I like the company, but currently think it’s overpriced (e.g. Wal-Mart.)  What I’m saying is “This one’s worth watching, but don’t buy it at current prices.”  I also try to stick to stocks with high liquidity, so whatever I say won’t have much of an effect on the stock price.  If I find a stock I like in my research, I buy it for my clients and myself. 

The goal of this blog is to give you the tools to invest profitably for yourselves.  To do that well, you need to do your own research (if you’re going to use any active investing approach.)  Passive indexers can get slightly-below-average returns for very little effort, and, as unappealing as “slightly below average” sounds, it’s a lot better than the typical retail investor does.  For those of you who do not have the time or inclination to invest for yourselves, I hope to give you some insight into my methods and character, in case you or someone you know is looking for a professional to manage their money.

So don’t come here looking for stock tips, and be very wary of any stock tip you come across in a public forum.  The more people who see a tip, the less it is worth.  That’s why you’ll probably lose money following Jim Cramer’s picks, despite the fact that he seems to be (in my opinion) highly intelligent, if highly annoying.  There are just too many people following his advice.

The only useful information in the stock market is private information: things that the market is not yet aware of, or is currently ignoring.  Do your own research, pay someone who only sells his advice to a few people, or use passive index investing.

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7 Comments

  1. goldguru said

    (TK comment: My orignal post was quite suspicious of goldstockguru.  While caution is always warranted, I should not have jumped to hasty conclusions.  This was his response.  I’ve since modified the blog entry, and apologized.) 

    “Be afraid. Be very, very afraid.” How dramatic.

    I did read your blog, which seemed like a relevant place to post because it referenced biodiesel having a better energy return than ethanol, which has been getting much more attention in the investment community.

    I was not trying to “push my favorite biodiesel stock.” If you would have read my article, you would have noticed that I do not own any Nova stock. I have never been part of any pump and dump scheme and deplore the idea. My intention in posting was to provide relevant information to those interested in biodiesel, including ways to invest. I don’t write much about renewable energy stocks, so it was just a way to reach out to the community that might want information about them. I also mention in my article that readers should “do their own due diligence, especially with bulletin board stocks that carry a higher risk profile.” Hardly the commentary from someone trying to trap people into buying a penny stock that is about to “explode.”

    I am assuming you woke up on the wrong side of the bed or are just too quick to jump to conclusions. The glass is not always half empty and people’s intentions are not always evil.

    Peace to you,
    Gold Guru

  2. I’ve signed up to receive research from a few places and I get calls on the phone with people saying I should buy this or that. I’ve never looked at a chart to see the progress of a penny when I get spammed, but I’m thinking common sense corroborates your post findings. Regardless of what gold guru is saying (which gold implies speculation, to me), people that are pumping stock (including Cramer) have something to gain from the pumping. Why else would you talk about it?

  3. tomkonrad said

    I think goldguru is probably honest in that he does not own the stock.  But I have no way of knowing.  Most likely his motivation is that he wants to build his reputation as someone who has good ideas.  That’s certainly my primary motivation for writing this blog. 

    A lot of people have a lot more time to do research than they have money to invest.  For them, the gains are emotional, rather than monetary.  Or the monetary gains can come in the form of subscriptions to an advisory service.

    But I think all recommendations should be approached with a healthy suspicion. Since Cramer is a public figure, his holdings are audited and diclosed when he mentions them. As an independent RIA, mine are not actively audited, although I have to keep records and they are subject to spot checks by my regulator, so there is a sort of retroactive auditing process going on. I may never be audited, but I know I could be. I disclose to clients my interest in stocks when I recommend a trasaction, and I always give clients priority over myself when making transactions, but in that case I’m making money because they pay me.

    When I mention a stock positively here, I and my clients almost certainly already have an interest in it. I don’t want to suggest others buy on my research before I get a chance to act, so I’ll usually wait until I have acted. Most of the time, though, I just don’t mention specific stocks.

    A lot of brokers will simply recommend stocks/mutual funds that they think are good not because they own them, but because they will make money if you make a transaction.

    There is always some sort of conflict of interest. I would actually be cautious of following the recommendations of people who have no interest in a company, because they don’t have a lot of incentive to look at all the downsides. This is legal.

    Someone who owns the stock may have looked into the downside, and fail to mention it because he wants you to help pull up his stock price. For an investment advisor, this would be illegal; we legally must put our clients interests *ahead* of our own, so at least you know that if this happens, you have legal recourse. If you get a bad recommendation from a broker because he was unmotivated to do good research, you don’t have a legal leg to stand on.

  4. [...] Just heard a good segment on NPR’s All Things Considered, which ties in well to the blog post I wrote last week.   [...]

  5. [...] I am beginning to doubt that the comments were left by a spambot (and, mea culpa, this would not be the first time I’ve jumped to conclusions about spam); the repetition may have been due to Mr. Ferreri submitting the same comment twice [...]

  6. mike said

    Very helpful read there thank you. I am new to the penny stock market and looking to invest in a new emerging company like FRCN. Would anyone provide me with their thoughts pertaining to this company? Maybe take a look at their chart and recent news etc… to help me make a better evaluation of this company?

  7. [...] Penny stock “tips” [...]

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