Monday, November 30, 2009
Allen came to me with the fax sheet in his hand. He had gotten it at work.
"I think I'm going to buy this stock. It sounds amazing."
Allen was holding a tout sheet. Some tiny medical company was going to introduce a revolutionary new wound spray. Its stock traded on the pink sheets, the Wild West of the stock market. Shares were going for 11 cents.
I shook my head and asked, "Allen... do you really think someone out there is handing out great free stock tips? By fax? Anonymously?"
Allen sobered up. "Probably not. Why send it to me though?"
My friend Allen is a smart guy... without much real-world investment experience. He didn't know what every investor should know: There is a thriving industry based on the art of the "pump and dump." If you're not careful, you'll get burned.
You see, some financial publishers rent their mailing lists to stock touters (aka "promoters"). These firms get paid to write pseudo stock reports on tiny companies.
I'm on a lot of mailing lists, so I get stock touts all the time. Many are about tiny companies sitting on big resource finds... like a gold mine or oil deposit. These touts name the company. They give you the stock symbol. They spend eight pages telling you how great the company is.
And then... in tiny type on the last page, the promotion will say something like: "This publisher was paid $250,000 by Company X to write this up. This publisher, his family, or his associates may own shares of Company X. They may be selling their shares as this report is being disseminated. This publisher is not liable for any financial loss you may incur from acting on the information in this report."
In other words, "Hey buddy... Here's a great stock that's going to go way higher. And I'm happy to sell my shares to you."
Like most disclaimers, the ones on touts usually go unread. And the tout will send shares of the tiny, thinly traded stock way higher. Insiders dump their holdings on the way up. Outsiders who don't know any better end up holding the bag.
Sure... it's distasteful. But these "pump and dump" operations are 100% legal in the eyes of the U.S. government. A group, company, or individual can say all kinds of rosy things in order to get you to buy a stock so he and his cronies can dump their shares onto you... as long as they include a disclaimer about their conflicts of interest.
Can you end up winning on some of these pump and dump stocks? Probably a few. But you should ask yourself: Do you really think someone out there is handing out great free stock tips? By fax? Anonymously?
You'd be better off answering "No" and moving on. You'd be better off taking investment advice from someone who only works for his readers... and not the companies they write about. If you're not sure what your newsletter's policy is, call 'em up and ask.
Next time you receive a free hot stock tip, especially one you didn't ask for, consider the source. Read the fine print. Read it over the garbage can and let gravity do the rest.