If you have ever made and investment through a brokerage or bought into a mutual fund or made a subscription to a money magazine you have probably been put on a mailing list. And if you are like me and are always on the look out for a good place to invest, your interest will be tickled to see such offerings for the most part, especially if they are coming by way of snail mail and not making a total waste of your e-mail account. There will be a large slice of these offerings that come through that will be junk and they can be very time consuming if you don’t know what to look for. Here is the key.
Most of them will look very familiar when they arrive. They all say pretty much the same thing. Here is my next stock pick that will be moving up big time in the near future. Jump on board now before you have time to think about it. They will proceed to give examples of the last big picks they made and how much money these picks went up since they recommended them. Then they will go into how great and wonderful their latest pick is. They will use less than great detail on their latest wiz bang selection however. When I say less than great detail, I mean that they will use every possible way of letting you know where this stock could be headed if such and such happens and why it can’t miss. This is selling the sizzle and it has been around for years, just look at MLM and other investments that are driven by hype . It is when you start looking for the meat that things come up short.
They won’t tell you what sales are or were but they will project rosy estimates for future years. This usually means there aren’t any current sales to report, but they won’t tell you that. All real companies have expenses but for some reason these never seem to be important enough to tell you about in their company analysis. Profits and losses are computed from sales and expenses so here again you may see sky high estimates for the future but seldom if any current real numbers. Also, the balance sheet is almost always overlooked, a sure sign that the actual sight of it would scare off any rational investor.
Rule #1 If you run to your broker to put in a buy on these or any recommendations/hot tips before doing your due diligence and properly analyzing the stock, Do Not Blame Me.
Now for the big time saving hint. Flip through the pages to find the small print. They will have it because it is the law that they tell you this one thing, “Important notice and disclaimer: This stock profile should be viewed as a paid advertisement”. If you see this or any words of a like manner, read no further, throw the thing away, it is of no value.
Well maybe there can be a little value. They are good for a laugh sometimes. And you can get an education of what to look for in order to know what to avoid. But once you know the basics, there is nothing more to glean. Just be sure to recycle if it’s available.
The close cousin to this is the Pump and Dump scheme were a person owns a stock and talks it up, promoting it as much as possible to see if he can increase demand for the stock and thereby make the price go up. Once it is up, he sells off his shares to reap the profits and let the chips fall were they may. If you read the fine print you may well see that the advertiser has been paid a fee and quite often a chunk of stock so that if he does well in his selling efforts he will reap rewards twice. This works on small cap stuff the best and this is were you will see the most of it happen, but it can happen on a larger scale. The important thing to remember in the investing game is to know what it is you are buying, know what it is worth, and know what you are paying for it. Oversimplified I know, and a lot more learning to make it so, but anyone can gain knowledge and apply it if they are willing to put forth the effort, and when it comes to your investments there isn’t anything more important than putting forth your effort.
This is Ed Nef with a view from the Farr West.
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