I recently re-entered the US stock market with some faith on a penny stock newsletter. The advisor sounded as if he had a sound strategy. He boasted of the possibility of getting rich quick. I re-entered the stock market hoping that my investment would double perhaps in a month or two.
At first, I followed the advisor’s recommendations. Placing some amount of my money into the recommended stocks. Luckily, my money management strategy was that I mentally put a stop-loss between -7% to -10% of the price, adjusting the total purchase value such that the value lost would not exceed 15% of my total investment. Hence, the losses that I experienced did not significantly eat up my total investment, though I lost around 10% of it.
After 3 or 4 trades, I kept losing my investment because the price of the stock always hit the stop-loss. I decided to stop following the advice and discontinued the newsletter. Luckily, there was a 45-day money back guarantee which I exercised.
The thing that I noticed was most of the time, after the advisor gave a recommendation, the price of the stock would increase and I was never able to buy the stock at the desired buy price. It was always higher or at the higher end of the buy price range. But as I was already psyched up by the flowery words from the newsletter, words that gave a very promising near-term prospects for the stock to gain value, I was persuaded to buy at a higher price.
The second thing that I noticed afterwards is that the price would normally drop after I bought the stock. I wondered why almost every time, the price of the stock would increase, but then it would decrease right after I made a purchase.
Then a horrible thought came to me. What if … what if the advisor buys a penny stock before he puts out his recommendation. What would happen is that after his recommendation is out, followers of the newsletter would eagerly buy the stock. With a higher demand, naturally the stock price would increase. That’s when the time is ripe for the advisor to sell out his holding. The guy would certainly have a gain in his investment in just a few days. The act of his selling is like dumping the stock, and as an after-effect, the price would fall back to near its original price. The fall would cause other share holders to worry and hence they would further drop their holding of the stock. And the drop becomes steeper.
So who lose? Me and others like me who have our trust in the words of the advisor.
My advice is when you subscribe to a penny stock newsletter, it’s better to observe first before you buy the recommended stock. Check the stock price behavior for perhaps 5 or 6 recommendations. If the behavior is like what I described, then the newsletter is likely a scam.