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September 23, 2007

How Not To Invest for your Retirement

posted by MR WAVETHEORY at 9/23/2007 07:34:00 AM
I visit the finance message boards occasionally at Yahoo to see what people are talking about. I do it just for kicks rather than for investment advice, so it was interesting to see some posts about people buying and selling "momo" sticks and getting burned. One of the top Nasdaq stocks on Friday was a company called "Handheld Entertainment" (Nasdaq ZVUE) and so I checked out the board. As usual, many people were bragging about how much money they made trading Handheld Entertainment which was to be expected since the stock had gone up 55% on Friday. However, I saw a post entitled "i lost $20K on ZVUE - why ZVUE is pump and dump". The title of the post could also have been "How to invest Never to Retire" because it talks about an investor who bought ZVUE when it ran up to $7 last time the stock made a mysterious rise. Apparently, the poster sold it at under $2 before it mysteriously ran up again on Friday. I bet he must be pissed. I would be if I were him. It's a sobering lesson that there are many ways to invest, but that investing in momentum stocks is a sure way to the poor house - for everyone but the pump and dumper. There is an interesting reader comment from last week about ZVUE. The reader noticed that "they" started a spam campaign on Thursday right before Friday's big rise.

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Blogger Davis Freeberg said...

The sad part is that this Yahoo! post is probably the only honest thing on the board. The message boards are like the wild west. Entertaining yes, but helpful definitely not. If finance blogs are considered the tabloids of business news, I'm not even sure what to classify Yahoo! as. Still it's amazing that their spamming seems to be working. It's not even the posts they make on the ZVUE board, but the cross posting on the other hot stock boards. Timed with a couple of press releases and a few lazy journalists and it's easy to disguise the activity as being driven by legitimate news.

The sad part is that people really are throwing away their retirement by refusing to do any kind of due diligence. The message board spam is sneaky, but at least it can be tracked, the ads that people take out in the business press are much more dangerous because there is no way to know when a campaign is going on. ZVUE may still end up moving higher, but sooner or later the promotion will stop and these new shareholders will find out the hard way, why it's not a good idea to by stocks that are advertised.

4:25 PM  
Blogger MR WAVETHEORY said...

Thanks for the commeetns Davis. The boards are so full of spam I wonder how large these operations are and how many people are involved, because the spammers would not be doing it unless they were making lots of money.

I wonder how they calculate their return on the spam campaigns. It must be a large number. And yes, they are so sneaky. Whenever the spam campaigns begin, there are literally posts every 5 minutes on these stocks. Sometimes, there are posts every minute.

6:36 PM  
Blogger Davis Freeberg said...

I started watching the spam market about six months ago, when I realized how big of an industry it really is. Just about everyday, there is a different microcap being pushed, but there are some general trends that I've noticed. Normally a campaign lasts about 20 - 40 days and depending on how many resources are used, you'll see anywhere from 50% - 400% movements before the dumping really begins. If the spammers control management, then the movements are helped a lot by fake press releases and free warrants gifted to promoters. If the spam is just an innocent company, then the campaigns tend to be a lot shorter.

There are definitely people who follow certain "investor relation" companies and who try to buy ahead of these, but I think it's a lot easier to identify penny stock bubbles, then it is to try and play musical chairs with the spammers.

Earlier this year, I took at look at the 12 month performance of IBD's "corporate news" section of their site and found that had you shorted all of their ads for a year, you would have been up about 50%.

There are people out there like Sharesleuth and Stocklemon who try to bet and then expose these schemes, but they are no match against so many pumpers. The crazy ones to watch are the ads that get onto CNBC, these seem to be the stocks that have the most questions. A few months back, they were running RVNG ads and the latest campaign has been for CAJT.

Both of these companies were pretty much worthless at the start of the year. According to a Dow Jones hit piece on CAJT, at the top they had a market value of over $400 million. StockLemon's latest target, JRJC got to over $750 million before he called out Breen Murray for continuing to recommend such a speculative investment.

If someone had the deep pockets to absorb the volatility, I think they could make a killing by betting the other side of these things, but I'm really more interested in watching the industry because it's the equivalent of a financial soap opera to me. Everyday, there is a new villain to watch and every now and then someone comes forward and exposes what is really going on. It sucks that people aren't smart enough to figure this out, but it is certainly fascinating to watch promoters get away with this kind of stuff.

9:35 AM  
Blogger MR WAVETHEORY said...

Davis, your research is fascinating. I noticed that JRJC has made quite a big move in the past couple of days. Only a few days ago, the stock was just $10 and was as high as $40 - all from the acquisition of a tiny $3 million HK brokerage firm! These stock promoters must be incredibly powerful to take a $3 million acquisition and turn it into $300 of market value. StockLemon is a great name by the way! Someone with deep pockets is clearly behind JRJC. I'm seeing Renaissance Technologies behind this one. By the way, I think they were behind KONG and HRAY too. What a bunch of stock pumpers!

1:15 AM  
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