I SHOULD BUY RIGHT NOW! or maybe … later?

By Travis Johnson, Stock Gumshoe, December 18, 2007

I was just browsing the Stock Gumshoe Spreadsheet, which I am wont to do from time to time to see if anything interesting has happened to these companies, and at the same time it occurs to me that I’ve recently seen a good number of enthusiastic emails and comments from readers who are frantic to rush out and buy a teased stock.

And so, a word of minor warning that I hope those of you who have fought these demons already won’t consider to be patronizing:

This is for those, myself sometimes included, who are fighting the strong burning greed urge that the newsletter ad copywriters are so good at lighting in our bellies. In almost every case, the “urgency” that is used to fire you up and get you to subscribe, immediately, to whatever newsletter it might be is simply a marketing construct, and is rarely well grounded by the facts or fundamentals of a company.

This is complicated by the fact that when we talk about small stocks — microcaps, companies with market capitalizations of $500 million or less (or fractions of that, in many cases), the urgency created by the newsletter can predict the stock’s future … but often only in the short run.

What do I mean by that? Well, as is the case with the “Marl” Doubling Stocks service that I wrote about a couple weeks ago (and which virtually all of my readers have opined is a simple pumping scam), the act of recommending a stock itself changes the performance of the stock, making the recommender automatically look good for a brief while. That’s the heart of the “pump and dump” scam, of course, drawing in momentum investors by frantically boosting a share price, but even when it’s not nefariously planned, it works much the same way.

This is kind of like the microcap investing version of the Observer Effect, which refers to the fact that looking at or measuring something has an impact on that object. So shining a light at a microscopic object so that you can view it through a microscope means that a photon will hit the electrons of the object, so you cannot view it without altering it, however imperceptibly.

I apologize for mangling the science there, but the impact of a stock recommendation on the movement of that stock can generally be expected to be quite perceptible … and if it’s a heavily advertised recommendation and a very small stock, the impact might be massive, though it almost never lasts forever.

Let me offer up an example or two from Gumshoe history.

Keyon was Jonathan Kolber’s recommendation that was going to light up the rural sky with broadband WiMax signals and reap the rewards. It still might … but really, is there a rush?

The stock traded pretty consistently in a range of $6-8 for the two months before Kolber’s service started touting it in teaser ads. When his recommendation went live in the first week of November (and right around the same time, was sleuthed out by the Gumshoe), it jumped from $7 to $12. It stayed up in that lofty area for about a week or so.

And where is it trading now? $7. Six weeks of sturm and drang, signifying nothing.

That’s not to say that Keyon is either a bargain or a scam, or that it is ripe for buying or, conversely, was never worth anything … Kolber might be right, this might be a great company that will do well in the long run, but it’s rare that there is really a short term catalyst for these tiny stocks that a newsletter editor can predict and that will have a lasting fundamental impact on the shares.

Put more bluntly, a quick jump up on a stock tout is rarely the best time to buy a stock, especially if you’re trying to invest in a long term “story” that revolves around the stock’s fundamentals and their actual business. And those who have the stomach to try to get in and out with a short term profit by timing your moves around these big jumps, well, better you than me — they certainly don’t happen every time, and there’s rarely a billboard on the chart that says, “oops, today’s the day the newsletter steam runs out … sell!”

Chris DeHaemer has had quite a few of these kinds of stock picks, too — widely advertised as ideas that “about to be released” to a select group of subscribers, with heavy email campaigns pushing the teaser out there to drive up subscribers. That’s not much different from what many of these outfits do, of course, but it stands out when they pick teensy tiny companies … and that’s what I usually see from DeHaemer at his various Taipan publications.

There are a couple examples that stand out as firms that got boosts from initial recommendations, then fell back to earth and are now near or below their price when the teaser emails started flowing. DeHaemer’s that come to mind are …

Rusina Mining (this was the secret mining operation that was going to be taken over by China in a desperate thirst for Nickel) … 8 months later, it’s up 9% or so at .24 cents, far below the “at least $2” that was spoken of as being the target in “a matter of months.” And far below the price that the shares were driven up to following the teaser recommendation, which was something like .55 cents. Maybe they were counting on the price of Nickel continuing to rise to the sky, which it didn’t really … or maybe they were just trying to get you excited to subscribe to their newsletter? Whatever, buying the shares a few days after the email touts started rolling would have been absolutely the worst time to buy, at least in the short term. Hey, maybe it will go to $2, but the “matter of months” ship has sailed.

And one of my old favorites remains Range Resources, which was supposed to have locked down oil rights in Somalia –– this one got bandied about for quite a while on the Gumshoe Forum and I wrote about it more than once. Fascinating story, and now that we’re nearing the end of the year and seeing all the lists for 2007, I think I’ve seen in several places that the crisis in Somalia was one of the “most underreported stories” of the year. Range Resources may well end up reaping millions from it’s Somali deals, but if you bought in to the promise of 800%+ short term returns you might be disappointed — the shares were teased when it was at about .42 cents back in the Spring, and they shot up almost immediately to about a dollar. In the face of constant email campaigns from DeHaemer they remained up near a dollar for a couple months.

Today? Well, if you love the fundamental story behind Range Resources you should be delighted — you can pick up shares for close to where they were back in April, right around .45 cents. More power to you.

These three stocks are far from the only examples of this, and I’m not trying to pick on a particular newsletter editor — go back and check out Andrew Mickey’s recommendation of Playfair, the Labrador tungsten miner, if you want another one with a similar chart — a big boost when the email campaign rolled through town, and now it’s trading right about where it was the day the emails started flowing.

Or the Bayou Bend Petroleum teaser — that one is now significantly cheaper than it was before we all gathered around to hear the tale spun of a railroad baron’s widow and her island paradise that lay perched gently atop a $4 billion prize.

The lesson for the intrepid Gumshoe readers? When we sniff out the solution to a heavily marketed email teaser, it might behoove us to avoid letting the excitement of discovery impact our portfolio decisions when we’re still under the influence of the powerful, intoxicating copywriting of those fabulous advertisements.

After all, even GoFish sounded like a fabulous idea the first time you read the teaser email for that one, right? The next YouTube? Back when we all thought Taylor Hicks was really a celebrity? That’s my bet for the first one to hit a return of negative 100% on the Gumshoe spreadsheet … only a few cents to go.

Did the newsletter editor really uncover a brilliant pick that’s worth paying double for in the initial enthusiasm? Or is it merely an intriguing idea that maybe you want to come back to in a few months? Remember, if a stock is advertised as having the potential to go up by 1,200%, missing the first 80% in a fit of patience might not be the end of the world — for many of these tiny stocks, that first 80% might as easily be down as up … and for some of them, even the Gumshoe’s faithful readership is probably big enough to move the shares if we’re so inclined, at least for a few minutes.

Besides, it’s good for the soul to teach ourselves to watch a stock skip higher and higher and higher during the morning and avoid hitting that “buy” button — how many times have you been snookered into one of those rapid uphill movements, bolstered by your newfound love for the company, only to find it right back where it started a couple hours later?

And I’d say that thought goes double for any teensy weensy company that you’ve never heard of that’s involved with any kind of mining, oil or gas exploration and production, or technology. In the short history of the Gumshoe, it’s been my experience that the disappointments outnumber the shining stars — and we’ve yet to see a single stock go up more than 200% and stay there … indeed, in nine months of tracking only a precious few have even doubled. Remember that when riches of 800% returns “in a matter of months” are predicted.

This daily downer brought to you by your friendly Neighborhood Stock Gumshoe, who does not currently own any of the stocks mentioned here. Have a great day everyone, and happy investing!


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11 Comments on "I SHOULD BUY RIGHT NOW! or maybe … later?"

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Anonymous
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Anonymous
December 18, 2007 4:26 pm
I have commented on this subject before.Your observations are right on tested by time. Most of the stocks are hyped only to rise and fall because in the case of minerals, they are not in production. The risk is whether the mine will come into production without going bust. Pre production share price is speculation. Investors only reward EPS proven over time. That being said,it is possible to find nuggets if your patient.The cheap share price allows the small investor to take huge positions cheap, in other words,the investor is accumulating rather than looking for instant wealth.How any analyst can… Read more »
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Anonymous
December 18, 2007 6:03 pm

I’m very new to your publication, but I do want to thank you for this wonderful webpage. I’m a 23 year old investor fresh out of college and fell for 1 or 2 of those pumper emails when I first started. Learning to rule your emotions and wait for the right stock are invaluable lessons. Use technical analysis and financial reports to gauge a buy, not your drive for MONEY MONEY MONEY!
-Engimuneer

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Anonymous
December 18, 2007 7:23 pm

My account is littered with these stocks none of which ,except Heritage Oil,have turned out to be anything. I’ve been spam riddle solving for years. I have to say some recommended companies had or have great product ideas and I am amazed that the they were unable to execute in a timely fashion. NEOM,BIPH,RTK,XSNX,MKTY……..
I have finally come to the conclusion that the spam letters are less to do with buying the service then perhaps being a pump.
As Gumshoe’s examples show.
Good trading, Shoeless

Anonymous
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Anonymous
December 18, 2007 11:49 pm

I agree with Engimuneer.

I too am fairly new to the stock market and have found these things out the hard way 🙂

I really do love this site though, fantastically written, it takes the ‘sleaze’ out of the stock market (does that make sense?).

Thanks again

– Pete from Australia

Tsmith
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Tsmith
December 19, 2007 5:12 am
Stock Gumshoe tells it the way it is, and most of these newsletters aren’t worth the paper they are printed on. These newsletters are hired out and paid by companies to promote their stocks, so read the fine print. I have had my share of losers over the years, however there are some newsletters that are good, check Hulbert’s newsletter rankings. I have done much better investing in stocks that pay a constant dividend such as Canadian Oil stocks, Utilities, etc – boring is good. A investor should only allocate a small percentage of their portfolio to these newsletter stocks,… Read more »
Anonymous
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Anonymous
December 19, 2007 6:49 am

I’m the guy that helped run all of them up! I bought Range, Geovic, Lynas, Rusina, Rusoro, and the rest of the touts. If you smell a stink its my portfolio. However, they are mostly basic resources and microcaps. My majors like Cameco and BHP have not done any better since the correction. Speculative stocks suffer the most in a downturn but when things turn around that is where you get rich. I’m still buying. Merry Christmas, Tom in Saint Paul

Anonymous
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Anonymous
December 20, 2007 1:19 am
Can you say “self-fulfilling prophecy”? If you believe there will be a shortage of something – toilet paper – and enough people go out to buy extra toilet paper, guess what? Shortage of toilet paper. I can’t say that I’ve ever been even tempted by these ads. Spam touting stocks is deleted before I can even read it. Not from a fear that I’ll succumb to temptation, but knowing that spammers falsify headers, etc., why should I trust them to tell me the truth about the product – any kind of product – they are selling? I don’t know of… Read more »
StockGumshoe
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StockGumshoe
December 20, 2007 1:45 am

Thanks for reading, friend — I agree, there are plenty of “get poor quick” scams in this world.

And I promise I won’t try to sell you a used car!

SG

Anonymous
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Anonymous
December 22, 2007 6:23 pm

I’m wondering about your Stock Gumshoe Spreadsheet….

I can’t see any rime or reason as to how information is added to the spreadsheet. Is this by design and if so why are you doing it that way?

Anonymous
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Anonymous
December 22, 2007 6:46 pm

I just posted a question about your spreadsheet and I NOW see you have it sorted by % gain. DUH ON ME!!!

So now for another question, hopefully not as dumb as the last.

When you make an addition to the spreadsheet do you provide us with a list of what you’ve added and if so by what means do you give us that information?

Thanks

Junhao
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Junhao
March 16, 2008 6:17 am
Hi Gumshoe I was actually wondering about the SA promise of 801k , & others get rich fast plan , when i did further reserch on the net , i get to your site , it was wonderful , i have been reading motleyfool for a year or 2 , but have not decided to part my money , rather from their ideas , i did my research on those company & think that i could wait a while more before i get in ( LuckY ) ! I have always admired Warren Buffet , & have been reading a… Read more »
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