How to Rob an Individual Investor Wednesday, June 27, 2007 | Dylan Jovine THE RICH HAVE BEEN DOING IT TO THE POOR SINCE THE BEGINNING OF TIME. Fortunately for us, itâs a heck of a lot more blatant (and therefore easier to spot) on Wall Street than it is in many places. Some call it a âhustleâ. Others call it a âcon jobâ. Whatever your pet name for it is, one thing is certain: if you donât see it coming, youâll likely wind up much poorer as a result and very, very sorry you ever ran into it. On Wall Street, as opposed to Main Street, the con takes a couple of different shapes. One is the famous and well discussed âbucket-shop hustleâ. Now, many people automatically think of small, dingy firms â akin to a boiler room â when they hear the name âbucket-shopâ. But those firms are responsible for a small fraction of the damage done to individual investors. To this very day, the most harmful âbucket-shopâ practices are engaged in by many of the largest brokerage firms in the world. It goes a little something like this: you get a call from a well-intentioned broker who has the âdeal of a lifetimeâ for you. After getting you all worked up into a lather, youâre convinced that itâs something you should purchase. What you donât know is that the broker who just convinced you to buy shares of XYZ was secretly selling them for one of the firm's largest customers. Before you know it, youâre left holding shares of a stock or bond that have decreased in value by as much as 90%. Although these kinds of shenanigans continue to this very day, the last really blatant example was during the height of the dot com crash in the late 1990s. The âcommission cartwheelâ is another variation of the same hustle. The only thing that changes is that, instead of asking you to buy a stock that somebody else is selling, youâre asked to purchase shares in a stock that gives the salesman an extraordinarily large commission. Whatâs particularly damaging about this little hustle is that it comes in forms that most people couldnât imagine. Sure, some folks expect to get hustled when buying shares of a stock. But oftentimes, people practicing the âcommission cartwheelâ hide their hustle behind otherwise innocent sounding securities such as bonds and mutual funds. Yikes! And of course, letâs not forget the traditional classic, the âpump and dumpâ. In its older incarnations, investors get called to buy a stock that is secretly being liquidated by the owners of the firms (as opposed to large clients of the firm). For example, you get a call to own shares of XYZ for $2 per share. What you donât know is that the firm calling you had an investment banking relationship with the company and is selling the shares allotted to them at sometimes pennies per share. So every time you purchase 1,000 shares of stock, you are really making the firm an âinvestment bankingâ profit of $1,998 if the bank owns the shares at $0.02 each. These days, the classic âpump and dumpâ has taken on a new and much hipper flavor with the use of email. This new and improved âelectronic pump and dumpâ does largely the same thing, but via email instead of phone calls. I canât tell you how many friends of mine â largely smart and successful people â shoot me the occasional email asking my opinion on a stock theyâve just been given the greatest tip about. I donât even respond any longer if the symbol ends in the letters â.PKâ denoting a pink sheet security. If they donât know to beware of those types of advertisements at this point (after years and years of my warnings), then nothing I can say will change that. Last but not least, there is another classic Wall Street hustle that Iâve failed to mention so far. Of all the hustles Iâve discussed, it is by far the sleekest and smoothest. In fact, itâs such a smooth and silky hustle that it isnât even illegal! But make no mistake about it â itâs just as dangerous (if not more so) than the rest of them. Weâll refer to it as the âIPO â Icicleâ and it goes a little something like this: When a specific industry group has a great run â say 5 or 10 years of excellent business conditions â the founders plan to sell their stock at the very top of the market. For example, right now â for the first time in history â private equity firms of all stripes are planning to go public. This is largely a result of the success (or the illusion thereof) of Blackstoneâs recent IPO. Why on earth would these otherwise greedy private equity mavens want to suddenly sell shares to the investing public? Is it that theyâve grown a conscience and want small investors across America to make some great money owning their shares? Of course not! What theyâre saying to themselves is that weâre at the top of a bubble in private equity. With low interest rates, a business-friendly administration and a low tax environment, things are simply never going to get this good ever again. So theyâre cashing out now. Right at the peak of the private equity bubble, when small investors who donât understand the cyclical nature of things are at their most fascinated by the billions of dollars theyâre making. This is by far the most dangerous of all hustles because it comes gift-wrapped by some of the biggest names in business whom you read about each day in The Wall Street Journal (Steve Schwarzman from Blackstone, Henry Kravis from KKR) and seems perfectly legitimate. And on the surface, it is; itâs not like theyâve planned a criminal enterprise with you as the victim. But thatâs just what makes it so darn dangerous. They know that youâre buying their stock from them at the top of a bubble. And yes, theyâre definitely taking advantage of that. But thatâs really what Wall Street is all about, isnât it: smart investors taking advantage of less informed investors? So consider this as fulfilling my job to inform you. Indeed, folks, trust me on this: you want to avoid these private equity firms like the plague right now. Iâm not saying they're not fundamentally good businesses. What Iâm saying is that buying shares in these companies now would be like buying into the Florida real estate market a year or so ago: a bad idea, by any stretch of the imagination. For those of you sitting around right now in the middle of summer looking for things to buy, beware. Mark my words when I say the private equity firms arenât the profit pond you want to be fishing in. (Please let us know what you think about Dylan Jovine's article.) Rate his article here » âAnother Brick in the Wallâ Dylan Jovine Chief Investment Officer Fallen Angel Stocks http://tycoonreport.tycoonresearch.com/articles/448115898/how-to-rob-an-individual-investor
In regards to pink sheet stocks or penny stocks...i think the most amount of people get conned by investing in these. Being very familiar with them myself, i have some advice. Research, research, research. Look up the company thoroughly and research testimonials online from investors with their money involved, not just suggestions. Here's a report that might help, it did for me...enjoy http://www.pennysleuth.com/rpt/pennystocks.html
A good post indeed. I recall when I first started position trading futures I worked in sales. We would get spam faxed all of these OTC bs stocks, hot buy, buy now, blah, blah. An older lady that worked there asked me my opinion and I told her about the bucket shop PND. She said really, that's horrible, ppl, do that legally? Yeah I said every day. My uncle who is rich and lives in Bermuda gets calls from brokers all the time. I told him don't every buy a freakin' stock from them unless they can show they are holding the same in the portfolio. Boiler Room, a great movie.....I was slinging crack rock and I didn't even have a jump shot. Too funny.
You see, these guys in suits gather round with a bunch of chicken carcasses and hilarity ensues. It's a laugh riot, really!