Apprenticed Investor: Seven Steps for Handling Stock Tips


Its finally here! After a quarter’s hiatus, the Apprenticed Investor makes its long awaited return.

Today’s column deals with two elements of investing/trading:  1) the huge surge in trading volume on the OTC bulletin board (shown in this chart last week); and 2) what this means — typically, we are witnessing the return of the hot stock tip!

Here’s a quick excerpt:

Yes, stock tips are hot again. Activity on the Nasdaq bulletin board (OTC:BB) is on the rise — volume has exploded nearly 40% recently (see chart below). And that is over the bulletin board volume record set in February.

I refer not to the small-cap stocks on the Russell 2000 but to the tiniest of them all — the delisted and Pink Sheets stocks. They have become movers once again, and that often means bad news for unwary investors.

I don’t mean the so-called spam stocks either, which’s Kevin Kelleher revealed to be huge money losers. No, what I am referring to are the word-of-mouth stock tips passed from person to person. Emails and instant messaging now help to spread the word faster than ever before.

The vast majority of these “tips” are for horrific little stocks that don’t have a snowball’s chance in hell of ever amounting to anything, at least not on a sustainable basis. Many so-called tips are nothing more than the work of paid promoters whose sole role in life is to run up the price of some worthless paper so sellers can exit at a higher price while the “tippee” is left holding the bag.

Yes, you read that correctly.

Stock promoters operate in the shadows, just beyond the reach of the NASD and the Securities and Exchange Commission, avoiding regulatory scrutiny by exploiting the fine line between legitimate investor/public relations and outright touting.

Under a variety of different names and aliases, touts often post breathless tales on the Yahoo! and Raging Bull message boards. Anyone who posts factual information that contradicts the story will be harassed on the boards and shouted down. Typically, stock promoters have a broad network of followers —
traders who can get in and out early of a promoted stock, pocketing a quick buck and leaving the unsuspecting retail investor holding the bag.

I could have very easily just written: “Avoid Stock Tips! They are almost all scams” —  but who would listen to that?

Instead, the column details 7 steps to take to help reveal when something has a high probability of being a hunk-o-$#%& !

Prior Apprenticed Investor columns can be found here.


UPDATE: April 24, 2006 2:19pm

A reader brought this story to my attention: Anatomy of Stock Fraud



Seven Steps for Handling Stock Tips
4/24/2006 7:54 AM EDT

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  1. Bynocerus commented on Apr 24

    Keep shouting this message from the mountaintop, Barry.

    As an aside, I have been privy to a “hot tip” several times in my life. Unfortunately, all of these tips made me someone considered “over the wall,” so I had to report the tips and sit on my hands while I watched the stock go up.

  2. Mythiot commented on Apr 24

    My guess is that much of the increased volume on the OTC bulletin board and pink sheets in recent months is for American Depository Receipts (ADRs), which are an entirely different animal than the typical OTC stock. For most US retail investors, ADRs are the only way to buy reputable foreign stocks that don’t trade on the main US exchanges.

    Examples of ADRs from my pown portfolio include China Mengniu Dairy (CIADF.PK, 2319.HK), Geely Auto (GELYF.PK, 0175.HK), Li-Ning (LNNGF.PK, 2331.HK), Pyatrerochka (PYATY.PK, FIVE.LSI) and Wumart Stores(WUMSF.PK, 8277.HK). These are great companies, with market caps ranging from $510M to $3B, and not hot stock tips.

    Barry, if a source could be found, it would be useful to break down OTC volume into ADR and non-ADR volume.

  3. Steve commented on Apr 25

    Thanks for keeping the series alive! It’s helping me not make as many noob mistakes as I might have otherwise…

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