| Dumb Luck! |
Dateline: 2/8/99
Now it can be told! A year ago I made a bad investment decision. I decided to buy a penny stock. After sinking almost to oblivion, the stock bounced back to record levels in the last two weeks. I have since sold it all, tripling my money in the process.
I hadn't planned to mention it (one hesitates to write about one's errors), but since it ended up as a pleasant surprise, I'll use it as a cautionary tale. Even though it worked out well for me in the end, don't do what I did. I was the beneficiary of dumb luck. Nothing more, nothing less.
It's everybody's dream - pick a hot stock - double or triple your money in a short space of time. We wish we were smart enough to have picked up Microsoft in its infancy so we would be millionaires today. Or even smart enough to have bought Amazon.com at $29 a year ago. But those are companies with a future. They're marketing useful products with a wide and growing customer base.
Along with the nuggets, there is a lot of fools gold in the emerging growth and penny stock markets. Separating the wheat from the chaff is not always easy. And so analysts and newsletter writers who purport to be able to do so are a popular commodity.
When I started doing this website I was naive about tout sheets on the Internet. So when I came across one that displayed a rather impressive track record, I took it literally to mean they knew what they were doing - my god, these guys were geniuses! What returns! How could one lose by following one of their recommendations.
At the time I was more of a mutual fund investor, rarely buying stocks at all. But you don't see mutual funds making several hundred percent return in a short period. You don't see the quick profits that accompany successful stock picking - particularly emerging penny stocks. And well, it is a temptation. I had $2000 sitting in cash in my RRSP, so I broke all the rules and plunged in.
I first started receiving the free emailed newsletter from this tout sheet on December 21, 1997. From then until Jan. 11, I received six - all of them very hot on a small company traded on the American OTC market. The company was called MIS International (stock symbol: MISM) and owned an auto repair centre in Oakville, Ontario and a number of retail pretzel outlets. The company CEO was an expert at franchising and had expanded the company considerably since taking over a year before. They had plans to purchase five locations in Florida for their auto repair business and a chain of 25 pretzel stores, also in Florida.
On Jan. 11, the newsletter announced MISM plans to list on NASDAQ and a report that revenues for 1997 were up 46% over 1996 for their pretzel business. The stock was moving up in price, so the next morning I ordered 2000 shares. I got them at $0.56 each.
Then trouble started. The company's attempts at financing for its acquisition plans got stalled and eventually derailed. A mutual fund that had shares in the company decided to unload their shares. By Jan. 30 the price was down to 30 cents.
It was around then I got a copy of Jim Carroll and Rick Broadhead's Mutual Funds and RRSPs Online. Chapters 3 and 4 were devoted to risks, assessing information, and avoiding fraud on the Internet. That was an eye opener for me, a trusting soul who was inclined to believe all the hype I read. After reading it I wrote an article here on the subject called Caveat Emptor: Investment Fraud & Misinformation on the Internet.
The newsletter involved was the GMT Newsletter and I wrote about the perils of outdated information on their site. They had a chart of their picks to date and their impressive returns. The chart, however, showed only the peak valuations the stocks reached. It did not show current valuations and most of their picks had fallen back considerably. Most were even down from the prices at which they had been recommended.
I also wrote obliquely about my experience with MIS International. "The day an emailed newsletter came out with some new press release information, the stock jumped from 31 cents to 59 cents before falling back the next few days to 31 cents again. Did it rise on the hype of the newsletter and press release? What do you think? This is not to say that (this) stock is a bad investment, just that you should be cautious." I was too embarrassed to mention that I actually bought some at 56 cents.
Now I should state for the record that the GMT Newsletter does carry a clear warning that penny stocks are volatile and not for everybody and that investors should use caution, do their own due diligence, and consult a broker or investment advisor, none of which I did. Buying those shares was the result of my naiveté about penny stocks and my failure to heed their warnings, and I don't fault the newsletter for that.
Later that year, the GMT Newsletter started carrying banner ads for MIS International. The relationship was pretty cozy. And the stock kept going down, down, down. It reached 10 cents a share on July 24 and 3 cents a share on November 3. I only record Friday closes in my records, but I believe the stock fell as low as a penny and a half eventually. GMT Newsletter informed readers it was no longer following or recommending the stock after it hit 4 cents. (GMT no longer carries ads for stocks it promotes.)
Then, in December, MIS International announced a change in focus. It was going to go into the Internet business by purchasing promising websites. The stock started moving up reaching 20 cents and then dropped back to 14 cents. It disappeared altogether on January 15. When I checked the stock price it was stuck at 14 cents and the last trade was given as January 14. I figured it had finally gone into oblivion - bankrupt - kaput - game over, and was ready to kiss my money goodbye.
But on January 28th, I decided to check out the chat thread on MIS International at Silicon Investor. I'm not big on bulletin boards so hadn't checked the chit chat there in over half a year. To my surprise the last message said the company had changed its name and stock symbol to Cosmoz.com and CMOZ respectively. So I checked the current price.
Wow! I couldn't believe it. From opening at 15 cents on January 15, the stock had shot up to $1.25! Add a dot com to a stock's name and everyone thinks it's a winner! The next day I followed it closely in the morning and saw it meeting resistance at $1.50, so I did the prudent thing. I sold half, netting a 25% profit on my original investment after brokerage fees. I still had a thousand shares to let ride.
The next day the stock hit an intraday high of five dollars, closing at $4. The following day, a Friday, the stock opened at around $4 and hung there for the early hours. I decided to sell another 500 shares when blooey - the power went out. A large windstorm in our area had caused a disruption. When I was finally able to check it again later in the day, it had dropped to $2.50 so I sold 500 shares at that price. It then moved up to close around $2.80.
The following Monday the stock moved to $3 and then quickly started dropping again and was settling at $2 when I decided to sell the rest. It sold at $2.31 as the price rose again. I was out of the stock now, having netted $5793 on my origianl $1800 investment for a return of about 220%. Not bad for a year. Of course, I speculated that I could have sold all 2000 shares at $4.00 if I had timed it better for a whopping $12,000 return, but basically I was happy to have come out ahead.
I was the beneficiary of dumb luck. Lucky that the managers of MIS International had the wit to turn it into an Internet stock, no matter how dubious. And lucky that there were enough witless speculators to buy the stock allowing me to turn a handsome profit.
This was my first venture into speculative penny stocks and it provided a few good lessons.
Here are the rules I broke in buying MIS International.
In this case, failure to pick a stop loss point worked to my advantage, otherwise I would have sold it when it dropped to 40 or 45 cents instead of letting it slide all the way down to a few pennies.
There are also some rules I followed:
When MISM hit its lows, I actually toyed with the idea of buying more because the downside was limited to pennies and the upside was - who knows. But I decided that was not a wise idea. I read of one person who did buy 70,000 shares at four cents. He made a killing netting over $150,000 on a $2100 investment. Ah! The stuff of dreams!
Will I invest in penny stocks again? Probably, but I'm not in a big hurry to do so. Maybe after I've read Chris Bunka's Outsider's Guide to Speculative Stocks. I tripled my money in an investment where I expected at one point to lose it all. It is "found" money so to speak. So I don't have any qualms about using maybe a third of it to dabble some more in the pennies. But the bulk of my portfolio will stay in quality mutual funds and value investments. That is, and remains, my primary interest.
You might be asking yourself whether Cosmoz.com is a stock to get into right now. In my opinion, no. Its first acquisition, likely through some equity swapping, was of a website specializing in microcap stocks called Investor's Guru. This is not a bad little website but hardly a great one. It's been around for four years and has established a following and revenues. Cosmoz.com has hired a PR firm. But details on the company remain sketchy if you follow the Silicon chat thread. Do they still have the auto shop? What about the pretzel places? Were they sold? Where is their head office? How many employees do they have? None of this information is readily available.
Cosmoz.com has 41 million shares outstanding of which 11 million are trading and the rest held by principals in the company. At $2.00 a share, that is a market cap of $82 million.
Now take a look at the Small Cap Investor website. It is a much more extensive site and part of a stable of seventeen websites owned by FinancialWeb.com, traded on the OTC as FWEB. This company has 3.5 million shares issued, currently at about $19 for a market cap of $66,500,000. Financial Web.com advises potential investors with this warning: "As a development stage enterprise not presently filing periodic financial statements with the SEC, FinancialWeb.com urges investors to use extreme caution if considering FinancialWeb.com for investment purposes."
If that is the case with a well established company with 17 websites and 8 more under development, how much more cautious should one be with a similar enterprise just starting out with a larger market cap?
One of Financial Web's sites is simply superb. The Stock Detective is dedicated to sniffing out dubious investments and evaluating whether various tout sheets are practicing proper disclosure of their vested interests in the stocks they promote. They include a section called Stinky Stocks and put out a biweekly feature called Red Light District, a warning about current dubious investments. Guess who's at the top of their list in their Feb. 8th installment!
Small & Micro Cap Investing Net Links - my collection of resources for small and micro cap investors. Includes small cap webites, small cap investing basics and a wide collection of newsletters.
Investment Fraud Net Links - my collection of Net Links on investment fraud on the Internet.
Cabot's Ten Rules for Investing in Stocks - these ten rules are geared towards general investing, not small cap investing. Thought provoking suggestions from the Cabot Market Letter.
Principles of Equity Investing - a short course on equity investing from RBC Dominion Securities. Again focuses on general investing, not small caps.
Disclaimer: As with all my columns here, I should re-iterate a precaution. I am not a professional financial advisor. I am a financial journalist and editorialist. The views in these columns are my personal opinions. The author may hold interests in a number of the investments mentioned in this article.
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