What James Altucher does might be legal, but it does not seem particularly ethical. Altucher is primarily known for his personal blog — a collection of his musings on work, family, and entrepreneurship, among many other things.
Altucher’s frequently brilliant posts have earned him a fairly substantial Internet following. I myself am a fan, and often share some of his pieces (like this one on housing) with my friends.
But unfortunately, every so often, Altucher will publish a piece on stocks. Most of the time, Altucher will push the shares of tiny company — which, given his enormous following, will frequently rally.
This is tragic, as the companies Altucher typically promotes are (to put it lightly) dubious investments. Sadly, many of his readers — including billionaire Mark Cuban — might follow him into these picks, likely tossing their hard-earned cash into the garbage bin.
‘The Stock Market Is For Suckers Right Now’
Altucher’s most recent stock piece can be found on Business Insider (go read it here).
After drawing the reader in with a clever title, Altucher proceeds to brag about how his bullish stock market forecast has fared — Mish Shedlock, Zerohedge, even Nouriel Roubini (these brilliant guys) all laughed in his face, he says. But who’s laughing now?
He then proceeds to construct a fairly sound argument to explain the market’s recent rally — corporations are buying back stock, driving down the supply of shares and shifting the supply-demand balance. All good so far.
But then, the reader comes to this:
“Stocks [will go] down…or struggle to stay afloat. [My solution is to] buy smaller stocks where I am not competing for information against massive hedge funds and mutual funds that do everything they can to cheat the system… I also invest in long-term demographic trends that I believe in. These companies will do well regardless of the overall stock market. It’s why microcaps always outperform large caps in the long run.”
Gets one excited, doesn’t it? Tell me James, what are these great small stocks that will “do well regardless of the overall stock market”?
What do these companies have in common? They’re tiny, they lose money, and with the exception of TrovaGene Inc (NASDAQ:TROV), they don’t even trade on a major exchange. In short, they are the sort of company Warren Buffett dreams of in his worst nightmares. (Not to mention, the notion that microcaps always outperform large caps in the long run — whatever that means — is completely without merit.)
As TrovaGene Inc (NASDAQ:TROV) trades on the NASDAQ, it may be worthy of consideration. But with a market cap less than $100 million, and no earnings to speak of, investing in the company is a crap-shoot at best. The company admits this in its most recent 10K:
We are a development stage company and have incurred losses since we were formed. As of December 31, 2012, we have an accumulated total deficit of approximately $55.2 million. For the fiscal year ended December 31, 2012, we had a net loss and comprehensive loss attributable to common stockholders of approximately $11.6 million. To date, we have experienced negative cash flow from development of our transrenal molecular technology. We currently have no products ready for commercialization, have not generated any revenue from operations except for licensing, milestone and royalty income and expect to incur substantial net losses for the foreseeable future to further develop and commercialize the transrenal molecular technology. We cannot predict the extent of these future net losses, or when we may attain profitability, if at all. If we are unable to generate significant revenue from the transrenal molecular technology or attain profitability, we will not be able to sustain operations.
Never buy an OTC stock
To put it bluntly, investors should never buy a stock that doesn’t trade on a major exchange (unless it’s a major foreign company, such as Nintendo or Samsung). A great piece explaining exactly why can be found here in the Foolsaurus. But, to summarize:
Companies trading OTC generally do not have to file documents with the SEC, can become public through a reverse merger and thus never have to disclose anything as pesky as a proxy statement for an IPO, and usually are shells of companies that don’t have revenue, often don’t have products, and are often hyped by hucksters sending mass emails out to suckers … I mean investors, in what should be viewed as pump and dump schemes.
Other stocks Altucher has championed in the past include Star Scientific, Inc. (NASDAQ:STSI) and Vringo, Inc. (NYSEAMEX:VRNG). Although these companies trade on major exchanges, they are equally as risky investments as the aforementioned over the counter stocks.
Star Scientific, Inc. (NASDAQ:STSI) has lost money for the last decade, and by the company’s own admission, it doesn’t expect to earn a profit anytime soon — if ever. From its most recent 10K:
We have incurred losses for the past ten years and operating expenses are likely to continue to be greater than operating revenues in the foreseeable future.
Even worse, the company cites liquidity issues and shareholder dilution:
The recurring losses generated by our operations continue to impose significant demands on our liquidity…Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to fund our operations…which could seriously harm our business and operating results. If we issue additional equity securities, existing stockholders will experience dilution.
Could it get worse? Why yes it can — the company’s CEO is currently being investigated by the SEC, and is involved in a political scandal with the governor of Virginia.