The Stock Market’s Dark Side

Elon Musk, founder and CEO of Tesla Inc. (NASDAQ:TSLA), recently did something highly unusual: he disparaged his company. Specifically, he knocked …

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Elon Musk, founder and CEO of Tesla Inc. (NASDAQ:TSLA), recently did something highly unusual: he disparaged his company. Specifically, he knocked Tesla’s share price, saying it is “higher than we deserve.” Whether true or not, to publicly state that your company is not worth its current trading value is not only rare, it’s virtually unheard of. It’s just not what a CEO does.

Because in addition to assuming responsibility for day to day operations, a CEO also acts as a company’s primary media pitchperson, head cheerleader, numero uno fan, selling the company’s virtues to the public and financial analysts. And always with a positive spin. Unless you’re a rare breed known as Musk, so it seems.


Sales, Man, That’s What Corporate Life Is All About

I’m not here to riff on corporations as evil entities myopically bent on achieving profit and maximizing shareholder value, all the while paying little heed to contributing to the social good and society at large. To varying degrees, some companies adhere to a social conscience, others don’t. For better or worse, such is the diverse nature of organizations, and humanity.

Still, regardless of how much or little a for-profit company gives back to its employees, communities, and our world, they all share something similar: they’re in the sales business. Whether selling goods or services, companies need sales to generate revenue to turn a profit to stay in business. And selling involves promotion, marketing, and advertising. And if you have a media friendly CEO, well then, all the better for driving sales, all the better for business because that CEO’s favorable image connects with consumers, persuading consumers to use, watch, listen to, or wear a company’s product.

Think Steve Jobs and Apple. Media loved writing about Steve, and Steve knew how to play the media, to manufacture himself as a near mythical legend, and position Apple as not only best in class but in a class of its own worthy of sticker prices considerably higher than rivals products. This sort of image making, however close or far removed from reality, impacts consumers buying habits and investors desire to own the stock, and consequently bid up share price.

Now, I’m not saying that Steve wasn’t a genius visionary or that Apple doesn’t make exceptional products. Instead, what I am saying is that you can have the most excellent product or service on the planet but if relatively few people know about it, and sales lag, then the company will soon fade away.

Apple doesn’t have that problem. They remain as extraordinary at the sales game as they are at manufacturing. And to this day, their image among consumers remains intact, best in class. As does their market value, which is higher than any other company on this planet, by far.


Promotion, Man, That’s What The Stock Game Is All About

Whether you’re a stock market behemoth like Apple or Google (NASDAQ:GOOGL), or a teeny tiny penny stock, in one way or another, you’re promoting your stock, i.e., you’re selling the merits of owning your stock because you want more buyers than sellers; this is how share price marches upward.

The typical medium in which behemoths promote their stock is mainstream media. Be it an interview with the CEO, a quote, a prediction as to what comes next in the stock market or economy, an annual meeting turned Woodstock for Capitalists (i.e., Berkshire Hathaway’s (NYSE:BRK.A) annual shareholders meeting), or a product unveiling (i.e., Apple’s annual Worldwide Developer’s Conference).

And while the CEO may firmly, honestly, believe in what they are promoting, we the consumer would be wise to interpret their words with a grain or two of salt. Because they’re just words. In the investing game, words are not enough. Not even close.

Numbers, not words, tell the story. On a basic level: Revenue, Expenses, Profit, these matter more, so much more, than words. I mean, words can be beautiful and flowery and convincing, and we’re all susceptible to oratory charm. But it’s important to see words for what they are, and in the financial world, words decidedly take a back seat to numbers.

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When The Numbers Don’t Add Up, Run!

Penny stocks are a different animal.

Technically, a penny stock is defined as any stock that trades for less than $5 / share. But for our purposes, a penny stock is one that trades for less $5 / share AND is not listed on a major stock exchange AND is a small company AND is often illiquid (i.e., relatively few shares are traded each day, making it difficult to buy and sell).

Now here’s the dark side of penny stocks: scammers LOVE them! And they can make a small fortune off people who don’t know any better, people who chase pots of gold and ends of rainbows, people who lay their bet on spam email promoting the latest and greatest 10 cent stock promising to power through to $10 or $50.

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The typical penny stock company touted by scammers? Little to no revenue, little to no shares traded daily, little to no business prospects.

And the angle, the hitch, the hook? The company says (words, words, words) that it’s changing its business model and is now in a HOT SPACE. For example, if the price of gold takes off, the company will morph into a gold mining company. If biotech is hot, you guessed it, the company reinvents as a biotech company.

Then, if it’s a big time scammer, they pay a promoter(s) serious coin (we’re talking hundreds of thousands to millions of dollars) to scream about the INCREDIBLE, UNBELIEVABLE, FANTASTIC investment opportunity presented by this itsy bitsy shell of a company. And the promoter(s) sends out millions of emails, many press releases, and arranges for inclusion in hundreds of investment newsletters and stock chat rooms. This is the modern version of a boiler room (i.e., refers to a bunch of guys [rare for women to engage in this activity] hard selling stocks to random people over the phone – well depicted in the movie, Wolf of Wall Street).

Once the word is out, once enough people have been suckered into becoming buyers of this worthless stock, the scammers start selling. Because, you see, before all of the promotional activity was set up, the scammers arranged for most, maybe all, of the issued stock to be in their name or, if sophisticated, the name of a faceless corporation. The faceless corporation gives them cover from regulators who have rules regarding the boundaries of promotional activity.

And if the CEO of Penny Stock Corp. says he doesn’t know who is behind the promotion, and the regulators cannot identify the promoter, then Penny Stock Corp. CEO has no worries. And he dumps his stock to pie in the sky investors who bid up the price. Until, that is, buying momentum halts, selling ensues, and stock price craters in a matter of hours or days.


The Case of Dry Ships

But you need a real life example. So let’s briefly describe what happened recently with a company called DryShips Inc. (for the full story, check out the detailed accounting here).

In November, 2016, DryShips disclosed a huge loss and suspended debt payments to preserve liquidity. Shortly after, the company, with a market value of close to $5 million, didn’t just catch fire, it was a veritable inferno! In just four days, the stock price leapt more than 1500%!

On November 8, its stock was priced at $5107, with a grand total of 38 shares being traded. Two days later, price jumped to $13,328 with more than 5,000 shares traded. Come November 15, price it $81,760 with more than 9,000 shares traded. By November 29, price had tumbled to $4849.

The journalist who wrote the article referenced above ends his story by referring to the “stock’s mysterious rally.” Well, other than being able to prove who was pulling the scam strings, there’s no mystery. The stock blasted higher owing to deceitful manipulation and nefarious promotional activity. Because absolutely nothing related to the company’s business activity justified a massive move in volume and price. And at the end of the day, guess who loses? Right, Joe/Jane Investor who were suckered into buying worthless paper.

As an investor, you do not want to get anywhere near this kind of stock. So please do your best to ignore any spam investing emails, ignore talk of a stock being “the next Facebook”, ignore any and all penny stocks because buying penny stocks is akin to gambling, not investing, and nine and half times out of ten, you will not exit your stake a happy camper.