'Phantom' 10-Baggers -- And What They Say About Investor Behavior

Brad Briggs's picture

Tuesday, April 4, 2017 - 12:00am

by Brad Briggs

Back in July of 2014, I shared an incredible story with StreetAuthority readers. I say "incredible," but the truth is it's all too familiar if you've paid attention to the stock market for longer than five minutes.

In that issue, I told the story of how an obscure company called Cynk Technology Corp had become all the rage among so-called penny stock investors. Touted as "the next big thing" in the social media startup world inside stock trading chatrooms and message boards, investors began buying up shares of the over-the-counter (OTC) stock -- sending it up a mind-numbing 23,000% in a matter of weeks.

The result? What was once a stock trading at six cents a share became a company with a $6 billion market cap trading near $15 a share.

Financial blogs and major news outlets began to take notice and did some digging...

Turns out, Cynk had a grand total of one employee, no corporate website, no revenue from the past three years and a grand total of $39 in assets. Naturally, the Securities and Exchange Commission stepped in and halted trading of the stock.

And just as soon as those foolish speculators (they don't deserve the term "investors") who bought the stock thought they had made a killing, they were swiftly wiped out.

Fast forward to this week, and I came across another crazy story from Bloomberg about a mysterious Chinese company that's gained more than 4,500% since 2015.

overvalued stocks, Wins Finance Holdings

Here's a clip from Bloomberg:

"Shares of Wins Finance Holdings Inc., a company that guarantees loans for small businesses in China and leases equipment to them, have soared as much as 4,555 percent since debuting on Nasdaq in 2015. The firm’s market value surpassed $9 billion in February, about four times as much as LendingClub Corp., an online lender with 50 times the revenue. Even Wins said in a release that it had no idea what drove the surge in its stock, which boasts the best performance in the Nasdaq Composite Index over the past 12 months."

As the story continues, it just gets weirder. We're talking about no evidence of an actual office at the headquarters of its U.S.-listed address, an association with a formerly-bankrupt New York financier, repeated denied requests for interviews with Wins executives, an uncovered backdoor method used to get the company listed on U.S. exchanges, executives with suspect operating history at former companies, the list goes on...

But what's really troubling is how could shares of this company -- which nobody without a direct affiliation can confirm that it's the real deal -- make it into the portfolios of millions of investors and retirees through the index funds that own it due to its listing on the Nasdaq and Russell 2000?

If I were a betting man, I'd say that more information turns up on this company in short order. And I wouldn't be surprised to see trading halted or shares removed from the indexes that list it.

If you're a student of the stock market, then you know that while the details may change, the story stays the same. There truly is nothing new under the sun.

The Original 'Pump and Dump'
Consider the story I've shared before that comes from Charles MacKay's classic book, "Extraordinary Popular Delusions and the Madness of Crowds," about the South Sea Company.

The South Sea Company was a British joint stock company formed in 1711 as a way for government officials to fund Britain's growing debt levels. The scheme essentially went like this... if you were an existing bondholder of Britain's debt, you were issued shares of South Sea Company. In turn, South Sea was granted an exclusive royal charter to conduct trading activity in South America -- which sounded lucrative on the surface.

But the story of South Sea became one of the earliest examples of irrational market exuberance. In fact, we owe credit to the events of this period for coinage of the term "bubble."

Meb Faber of Cambria Investments did an excellent job of recounting this story (and relating it to current markets), in his book, "Global Value." Here's a passage about South Sea from Meb's book:

"Trading in the South Sea Company was one of the earliest "pump and dump" schemes in history. South Sea Company's management lacked any relevant shipping and trading experience but were shrewd stock promoters that took office space in the finest area of London's financial district and decorated their offices with opulent furniture and art. The public could not get enough of the shares given the ostensible wealth that had already been created for South Sea's management group. In the end, when the insiders knew that the company's earnings would be abysmal, management began quietly selling at the height of the market. South Sea Company shares began to plummet, and to make matters worse, company officials allowed shareholders to borrow money to buy shares (effectively granting them margin). As share prices fell, investors were forced to sell even more shares."

There's a lot more to the story, but you get the idea. (I highly recommend reading MacKay or Faber's book if you want to learn more.)

The moral of the story is that whether we're talking about the South Sea Company, Tulip Mania, Bitcoin, Cynk or Wynns... There will always be bubbles... bad actors... and irrational behavior in the markets.

The Timeless Advice Most Investors Ignore
Getting caught up in the market's irrational behavior is a sure way to lose money in stocks. And nobody likes to lose money. So when looking to invest alongside the "smart money," I suggest turn to one of our top analysts, Jimmy Butts, who heads StreetAuthority's premium advisory, Top Stock Advisor.

Time and time again, Jimmy harps on investing in what we like to call "Forever Stocks" -- companies with dominant positions in their industry that have a demonstrated history of richly rewarding shareholders for years on end. You'll be much better off holding these kinds of investments than you would be chasing the latest market trends or hot penny stock.

Of course, I'm not implying that you can simply just buy any stock out there and expect to make money if you hold it for the long haul... but we do know that trying to time the market and chase stocks will not only likely be a frustrating failure, but a good way to lose a lot of money.

There's a reason Warren Buffett says his favorite holding period is "forever." That's because the S&P 500 has NEVER suffered a loss in a 20-year period dating back to 1950, according to an Oppenheimer study. By contrast, if, like most individual investors, you only hold stocks in your portfolio for a few months, then your odds of losing money are much, much higher.

If you're tired of losing alongside the "dumb money" and frustrated with the hysteria of the market, then Jimmy's Top Stock Advisor service is a great starting point. If you check out his latest report, you'll learn more about why investing in "Forever Stocks" is the way to go. To get your hands on this report, go here.

Brad Briggs does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.