The Dirty Rotten Secrets of the Small Cap Markets
LAW OF THE PEZ
This is dedicated to Murray Pezim, once the most powerful stock promoter in all of Canada. According to legend, Mr. Pezim, upon hearing that someone had made a killing on his stock play, immediately remarked,
"Shareholder profits are short-term loans." Ultimately, if you continue your small-cap speculations, you will lose. Either the markets will turn or you will drop your guard, but eventually, you will lose.
One should understand that the small cap stock markets run pretty much like a casino.... the longer you stay at the tables, the greater your chances of failure.
MOTTO OF THE STOCK PROMOTER
Sell when everyone is buying and buy when everyone else is selling. Actually, more often it is, sell when everyone else is buying, completely exit the play, and go find something else for them to buy later.
It may even be: Start shorting your deal when you've sold out your entire position so you can score even more profit on the way down. There are corollaries to this motto, such as "never get married to a deal," or "never believe in your own deal," or "have a new deal ready to rock & roll as soon as the current one flops."
LAW OF THE UPTICKS
Stocks that are running higher are said to be upticking. Despite every effort I have made to emphasize that the best time to buy a stock is when it is low and boasts a sorry-looking flatline stock chart, speculators inevitably chase stocks to new highs.
Stock promoters and insiders buy, or obtain a position, at the low and sell during the promotion or "discovery." Sadly, there will always be some type of promotion that will create upticks and speculators will chase that stock to a new level. Greed generates upticks. What stock promoters know that you don't is this law:
A herd of speculators WILL ONLY BUY ON THE UPTICK, every stock promoter knows this.
AXIOM OF GREED
In an earlier essay, I isolated that greed originated from a "perceived" lack of speculative opportunities. This false perception causes a speculator to get greedy and chase a stock to a new level.
If one has a hundred speculative opportunities on their plate, one is less eager to chase any specific stock. The lesser the number of opportunities one reviews, the greedier one becomes to chase a heavily promoted stock. A stock promoter will, thus, make "his stock" appear to look like the only game in town worth playing. Greed essentially emanates from deprivation.
RULE OF CONFUSION
The only time one rushes into a quick decision is when they are confused or disoriented or misled.
The stock promoter's greatest weapon is CONFUSION: Catch a speculator off guard and sucker him into a stock. The more disoriented or confused the speculator, the greater his chances of being snared. Stock promotions include an overwhelming amount of data, reports, corporate reviews and so forth that are packaged in such a way as to confuse the speculator. If, at any time, you are overwhelmed with out-of-control emotions or data which you don't understand, it is better to stay out of the play.
SECRET OF EXCITEMENT
You've heard about the "forbidden fruit" or "unknown pleasures." As long as something remains a mystery, it can create an "excitement." Excitement is a sensation which one commonly associates with pleasure.
Therefore, when an exciting proposition is offered, you may readily accept it in order to experience THAT sensation. When someone heaps excitement after excitement, upon you, in either the written or spoken word and/or with graphics (visuals, photographs, charts, drawings, etc.) and especially in a loud or emphatic manner, you become disoriented and confused.
One overcomes this "sensation of the unknown or forbidden" through experience, often with a rude and unpleasant awakening. Stock promoters abuse your inexperience, and naiveté, to sell you stock. ALL mining speculations are exciting until the assays come back or a mine goes into development. Then reality sets in.
LAW OF WAITING
The longer you wait, the greater your chances for failure. This applies to both holding a stock which is declining and to a stock which is running. The odds are greater than 90% against you... that you will fail in a speculation, if you wait for it to recover or if you chase a stock which has already begun its run.
Generally, a stock moves up in less than two weeks, often in two to five days. The waiting period, for a stock to allegedly recover, is the slow, dragged out retreat you later observe in the share price.
As believers stop believing, the share price declines, often never recovering. Of course, if one wants to wait forever, then eventually the stock may recover. The longer one waits, during a runup, the smaller one's potential profits and the greater one's exposure to losses.
(One important caveat: Occasionally, there are a few good deals--about 20 or 30 annually--when one SHOULD wait for the company to mature. Almost always, they come out of left field and, rarely, does anyone know in advance which company will become tomorrow's success story.)
AXIOM OF BELIEVING
The higher your expectations in a stock, the greater your chances of losing money (toot toot posters )in that speculation. All of the promotion is geared to make you a "believer." Most speculators are betting on a tip or a rumor. They are taking someone else's "word" for the outcome.
Absolutely no one should invest or speculate in a stock without understanding the risks as well as the reward. Stock promoters create believers by providing ONLY the reward potential, without also including the risk factors. Believers eventually discover the risks, long after the stock has begun its decline.
LAW OF LOSERS
Oddly, those most attracted to speculative markets are failures in other aspects of their lives. They may be wealthy, but consider themselves, in some way, as having "failed."
Medical doctors are prime targets of stock promoters, as they are not only affluent may have "settled for less" in their lives or feel they "are owed more" for the work they do. Whoever has failed, in some key aspect of their life, often tries to make up for it by gambling....often speculating in these markets.
The loser is always trying to compensate for a failure in another part of his life and continues to heavily lose as a speculator. (Note: I stay in touch with certain losers and use them as a yardstick for my trading -- when they buy, I sell; when they sell, I buy. The loser has a knack for exiting his position, a day or a week before a major runup; or he/she simply always buys at the top of the runup.
The downside to communicating with losers is that they are so darned indecisive and fretters; their worrying can and does rub off and creates a confusion for oneself.)
LAW OF THE SUCKER
PT Barnum was right: A sucker is born every minute. For every speculator that is wiped out, a fresh one is champing at the bit to start betting. Stock promoters prop up their plays by finding new blood to drain. The greener the speculator, the redder the carpet laid out for him. If there were no new suckers coming into the game, it would all be over.
The maxims outlined in The Dirty Rotten Secrets of the Small Cap Markets reveal a cynical and insightful perspective on speculative trading, particularly in the volatile world of small-cap stocks. These maxims provide a lens through which one can view the manipulative dynamics of the markets, highlighting the strategies employed by stock promoters, the psychology of traders, and the inherent risks of speculation. Here's an analysis of each maxim and its implications:
1. Law of the Pez- Summary: Shareholder profits are seen as "short-term loans." Ultimately, small-cap speculators will lose their money over time, either due to market downturns or lapses in vigilance.
- Analysis: This maxim underscores the inherent risk in small-cap markets, where volatility is high and long-term success is rare. The idea that speculators will eventually lose is a warning about the transient nature of stock price movements and the speculative bubble that often surrounds small-cap stocks. Investors may profit in the short-term, but the odds are stacked against long-term success.
- Implication: Investors should be aware that small-cap stocks, often promoted on hype, are inherently risky, and the longer one stays involved, the higher the chance of eventual losses.
2. Motto of the Stock Promoter- Summary: Stock promoters aim to sell when others are buying and buy when others are selling. This often involves creating a new deal as soon as the current one fades.
- Analysis: This reflects the manipulation tactics of stock promoters who profit by taking advantage of speculative euphoria. Promoters sell into the hype, capitalizing on the greed of others, and then look for the next opportunity. The emphasis is on being opportunistic, without any real attachment to the long-term success of the stock.
- Implication: Investors should be cautious of becoming overly attached to any specific stock or idea, as promoters often move on quickly once the stock has peaked.
3. Law of the Upticks- Summary: Speculators tend to buy only when stocks are rising (upticking), driven by the herd mentality and greed.
- Analysis: The "uptick" phenomenon reflects human psychology—investors are often driven by momentum and fear of missing out (FOMO). The stock price moving upwards creates a self-reinforcing cycle, where more speculators jump in, further inflating the price.
- Implication: This is a dangerous trap for investors, as it often leads to buying at inflated prices. Promoters know that as long as they can create upticks, they can lure in more speculative buyers.
4. Axiom of Greed- Summary: Greed emerges from a perceived scarcity of good speculative opportunities, driving people to chase single stocks.
- Analysis: This maxim suggests that when speculators feel like there are few options, they become more vulnerable to being "sold" a stock as the next big opportunity. Promoters create an illusion of scarcity to stoke greed and drive speculative interest in their stock.
- Implication: Investors should be aware of how scarcity is often artificially created to trigger greed. The more opportunities you see, the less likely you are to chase any single, overhyped stock.
5. Rule of Confusion- Summary: Stock promoters thrive by confusing speculators with overwhelming data and emotional manipulation, pushing them into rushed, ill-informed decisions.
- Analysis: This maxim highlights one of the most insidious tactics used in stock promotion: the overload of information. When overwhelmed, investors are more likely to make poor decisions without fully understanding the risks involved.
- Implication: Speculators should be cautious when presented with too much information or complex data they don't understand. If it feels confusing or overwhelming, it's often a sign to step back and avoid the trade.
6. Secret of Excitement- Summary: The excitement around a stock is often manufactured by promoters to lure in naïve speculators, playing on the allure of the unknown or the "forbidden fruit."
- Analysis: This emphasizes the emotional manipulation used by promoters. By making a stock appear exciting and mysterious, they tap into the thrill of speculation. Once the excitement wears off and reality sets in, the stock's true value (or lack thereof) becomes apparent.
- Implication: Investors should remain skeptical of high levels of excitement or hype. It’s often a diversion from the actual value or long-term viability of the stock.
7. Law of Waiting- Summary: Waiting for a declining stock to recover or chasing a stock after it has already begun to rise significantly reduces your chances of success.
- Analysis: This law highlights the danger of both holding onto a losing stock (hoping it will rebound) and chasing after stocks that have already seen significant upward movement. Both scenarios typically result in loss—either due to the stock’s inability to recover or by buying at unsustainable highs.
- Implication: Speculators should avoid emotional attachment to stocks, particularly when they are losing value or when prices are already high. Quick action and timely exits are often the key to mitigating losses.
8. Axiom of Believing- Summary: The higher the speculator’s expectations, the more likely they are to lose money, as stock promoters deliberately create belief in the reward potential while hiding the risks.
- Analysis: Stock promoters often build up the "story" around a stock to create a sense of belief in the potential for massive returns. This belief blinds investors to the risks and leads them to ignore cautionary signs.
- Implication: Investors should remain grounded in the realities of investing, not getting swept up in optimistic hype. Risk and reward must always be considered together.
9. Law of Losers- Summary: People drawn to speculative markets often have a history of personal or professional failure, which drives them to compensate for these perceived deficiencies through gambling in stocks.
- Analysis: This is a psychological observation about the types of people who are often most attracted to speculative markets. Those with a history of failure, whether in finances or other areas, may seek to "win big" in the markets as a form of compensation.
- Implication: Speculators should be aware of their psychological motivations and avoid trading based on emotional needs. The “loser” psychology can lead to impulsive, poorly thought-out decisions.
10. Law of the Sucker- Summary: There's always a new speculator (or "sucker") entering the market, providing stock promoters with a fresh pool of money to exploit.
- Analysis: This maxim captures the cynical reality of how the speculative markets function, where promoters are always on the lookout for new, inexperienced investors to replace those who have already lost money.
- Implication: New investors are particularly vulnerable to manipulation. The presence of a steady influx of new participants helps perpetuate speculative bubbles, making it important to understand the risks and the cyclical nature of such markets.
Overall Analysis:
These maxims together create a picture of a speculative environment that is exploitative, manipulative, and psychologically driven. Stock promoters use emotional manipulation, confusion, and greed to lure investors into risky, short-term plays, all while making sure they exit with profits before the inevitable crash. For the investor, the key takeaway is the importance of caution, skepticism, and critical thinking. Small-cap markets, especially those driven by promotion, are high-risk and often prey on human emotions, such as fear, greed, and excitement.
The advice embedded in these maxims suggests that successful investing in these markets is rare, and that most will fall victim to the cyclical nature of speculation unless they remain highly disciplined, informed, and emotionally detached. |
