How much does being foolish cost? It’s not easy to count that high and this was demonstrated in a story that recently hit the news.

In this world there are publicly traded stocks and while much of this activity is regulated by the SEC there is another group of stocks often called Microcap, Nanocap, or penny stocks. These stocks have a great deal of appeal to investors with a relatively small amount of money to put into their portfolio.

Low Buy In

The idea is that for a few thousand dollars you can purchase millions of shares of such a stock. Generally these companies promise they are working on some technology that will become mainstream. Thus the stock will increase in value dramatically. This means for a minimal risk you hope to reap a reward of millions of dollars. My father has invested in such companies. By coincidence just hours before I read this story I found out a friend is investing in such a way. The general attitude seems to be, what the heck, it’s a few thousand and I can afford it.

Nanocap Stock

Now to the story in question. CYNK Technology is a Nanocap stock. According to their filing they have one employee and no revenue. That’s zero dollars in declared revenue. As recently as June the stock traded for about $.10, a dime. As of this afternoon, although this is extremely volatile information, it was trading at over $20 giving it a market cap of over $6 billion because of the hundreds of millions of share available.

What does all this mean? We call this a Pump and Dump scheme. Generally the people involved in running the company, who own the vast majority of the shares, engage in practices designed to make the stock seem attractive. This brings in people like my father and my friend. They purchase the stock in huge amounts, although with a minimal outlay of cash, on the hopes the stock will rise.

This sends the stock to a high value but the problem is that unless you time things perfectly you can’t really sell it. There aren’t that many buyers out there willing to purchase such an inflated stock, only those, like you, who are looking to sell it quick as soon as it rises to a certain point. This happens so quickly that most people are left holding millions of shares of worthless stock when it immediately plummets back down to its real value.

In the end a lot of people are out money and the scam artists who own the company abscond with the profits. There is an entire industry that preys on those who spend a few thousand on such investments. They are wolves in the forest watching you. Waiting for you.

My Point

Don’t be foolish even if it’s just a fraction of your net worth. When you make foolish decisions you set a pattern for yourself. I understand the temptation but it’s far easier to fall into patterns than we realize and we’re also setting an example for those around us. If I purchase these things on a flyer and lose a few thousand it’s not going to change my financial situation but perhaps someone who admires me, if such a person can be found, might emulate my actions. Perhaps I might even convince myself that I was going to hit it lucky eventually. That’s the compulsive gambler’s story. Just one more spin they say and eventually they have lost everything.

I’m certainly not saying that one Microcap investment is going to ruin my father, my buddy, or you. I’m just asking a simple question, why be foolish, even once? Making good decisions can be just as habit forming as making bad ones.

Tom Liberman