They say that you can
boil a frog if you raise the temperature in the pot slow enough.
Well, the sensation you have as a short seller who has shorted a real high growth company is the sensation that the frog must have – you know that you are more and more uncomfortable, but the distress is not strong enough to get out until you suddenly realize that you have been boiled alive.
To avoid this distress,
we look for stocks that can never make it, that have huge hidden issues like undisclosed criminal convictions of the principals or worse.
The problem of shorting a
real company that looks like a promotion will rarely if ever occur if
you stick to shorting penny stocks.
Most penny stocks are
unvarnished promotions with no merit. Pump and dump penny stock promotions.
If there is any problems
with these stocks, it is (1) you can never tell when the promoters
will pull the plug so it is hard to pick the peak and (2) you might
not be able to short enough.
As to not predicting the peak, that will limit your profit but not give you a loss. Most of these promotions will go to oblivion, so no matter where you shorted them, you will inevitably profit. The question is only how much.
The way penny stock
promotions work is that the promoter gets control of a shell company
or one with very little business. This can be a Form 10 shell, or a
Footnote 32 shell, or just a nearly defunct company.
The promoter and his
associates may buy aged debt – convertible debt that is old enoughto qualify under the Rule 144 holding period.
After that, cheap stock
is issued to the promoter and his friends.
To set up the trading, a
reverse split may dilute out the prior existing shareholders.
Then a sexy company is
merged in the promoter starts developing the market in the stock.
More and more promotion is introduced. This stage is called the
“pump. When the promoter has had a chance to “dump” his stock,
he will pull the plug and stop spending on promotion.
The stock will then crash
for lack of new demand.
In your short position,
you will find that you are helped by the market makers.
They know which way the wind blows and will be shorting the stock on the way up and bear raiding the stock as it collapses. A well capitalized market maker will be licking his chops when he sees a rich penny stock promotion. He can just keep shorting all the way up, knowing that his whole position will be profitable eventually, whatever the price.
Usually, these penny
stock promotions are wildly under-capitalized. Why spend money on
developing your business when you can spend it on stock promotion?
Selling stock is a lot more profitable than selling products.
I have seen $4 million
spent on stock promotion (on which the promoters made $12 million
reportedly) and less than $1 million was raised for the company. The
company was lucky to get that. The stock, a former Form 10 company,
started trading for real below 60 cents, hit over $2.20 and now, a
year or so later is at three cents.
The company is not
always to blame. In this case, it was the reverse merger promoters
who took advantage of a legitimate start up effort.
Now consider, there was enough volume out there on this one to sell $12 million in stock from 60 cents up to $2.20 and now you can buy it back at three cents -- about a one year round trip.
Does that roughly 97% profit in a year with little risk that the stock will go higher sound like it might be of interest?
