Identifying Mechanics in Investment Analysis

Written By Alex Koyfman

Posted September 29, 2014

In the business of professional card playing, there’s a term for an individual who uses tricks and subterfuge to win: a mechanic.

Mechanics don’t play by the rules. Instead, they step outside the bounds of the game and do whatever it takes to win.

cardcheat

In Poker, it usually involves sneaking cards into the deck or marking them to stack the odds in the mechanic’s favor.

In Blackjack, it’s typically card counting — often using a partner and some sort of signaling device or system that tends to sway the odds away from the house.

Mechanics can be smart and crafty, but their inevitable mistakes and reputations usually make their careers short-lived.

The same goes for stock pickers… Believe me, because I’ve seen them all, and I’ve known them all.

In the business of stock analysis, there are professionals, and there are mechanics… Their goals are the same, of course — to make money — but their methods are radically different, and so are their outcomes.

If you read Wealth Daily and know some of the people I work with here at Angel Publishing, you’re already well acquainted with the real deal.

You know their names, you’ve seen their faces, you may have even cyber-stalked one or two of them (innocently, of course)… but, most importantly, you know what to expect from them.

Their methods for picking stocks and their strategies for getting in and out are all laid out for you, explained and justified in a hundred different ways.

Nobody guarantees a 100% success rate, but when it comes to targeting valid investment opportunities, these are the kinds of people reasonable investors listen to.

There is another breed — the stock mechanics — that you may be less familiar with. And it’s these guys that you need to learn to spot from a mile away.

These guys aren’t analysts… Rather, they’re hired guns whose only purpose is to run of the price of a stock and then dump all their shares (or allow their client to dump theirs) before the inevitable collapse.

They’re paid to do this. Sometimes, they’re even paid in shares of the company itself — as a little added bonus for pumping it into the stratosphere.

Here are a couple ways you can distinguish between a real stock analyst/investment director and a mechanic…

Hi, My Name is Stock Analyst!

anonymousperson

You’ll never hear his or her name, and the reason is twofold: First of all, anonymity is always a benefit when you’re facing the potential wrath of angry investors and intrigued regulators. It’s also helpful to not have a name when you don’t want a bad reputation following you into the next project.

Second of all, there might not be a single name attached to any of these boiler room-style recommendations.

Rather, they’re churned out by staff members or even contracted freelance writers.

Remember, there is no actual analysis going in on choosing the company, so it takes no skill other than some persuasive writing to generate an effective report.

This Will Be the Best Company in the World! (Especially once we decide on a product and marketing strategy)

Another red flag is that the company being recommended is a phantom.

Bear in mind that there are perfectly legitimate companies out there with tiny market capitalizations of $5 million or less that have product lines, functioning websites, revenue, cash reserves, and prospects for the future.

There are other companies — even ones with market caps that are far bigger than $5 million — that have and do none of these things.

Referred to as shells, these are little more than ticker symbols with some associated paperwork.

And when they’re pumped effectively, the results can be spectacular — despite the fact that there’s nothing behind the name at all.

Take, for example, a company that came on the radar of the SEC earlier this year.

Cynk Technology Corp. (OTC: CYNK) is a supposed social network designed to set up meetings between users and celebrities. 

Its shares climbed from $0.06 to $21 in seven weeks — and it ended its run with a total market capitalization of $6 billion (yep, with a “b”).

cynkfuck

Today, it trades for $0.10 again. The company never had more than one employee, and at last check, it had less than $50 in cash off-setting about $50,000 in debt.

Anybody who had done even the most basic research would have known most of these things and stayed away.

Thousands didn’t, however, allowing the company’s sole shareholder to sell off hundreds of millions of dollars in worthless stock before trading was halted.

Average Down!

If you’re unlucky enough to fall for one of these pump-jobs, the clues will start coming fairly rapidly.

For one thing, if you’re subscribed to the email alerts of whatever “service” did the recommendation and the stock begins to wane, you’ll start getting messages with subject lines like these:

“XXXX Is Now At Historic Bargains! Increase Your Position Today!”

“Short Squeeze Has Opened Yet Another Chance to Profit”

“The Shorts Are Running! XXXX Will Double Tomorrow!”

Or my favorite:

“I will RETIRE if this stock doesn’t double”

(Translation: He’ll retire that domain name and start a new one)

Overly enthusiastic, simplistic subject lines like these, followed up by equally enthusiastic yet somehow universally vague main body messages are always a sure sign that something is up.

Here is an actual email from one of these mechanics from earlier on in the summer:

Nearly half of the entire daily volume in XXXX was shorted yesterday:

XXXX kept fighting and closed moderately down yesterday, despite the amount that was short.

Today we could potentially see the same explosive situation we seen on Friday, with the T plus 3 rule in effect.

If this happens, it could be very favorable for XXXX, with short covers sending the share price through the roof.

We still have major confidence in XXXX – Keep watching!

Of course, it wasn’t the shorting that caused the stock to plummet… It was the selling. All the insiders and market makers who already had shares saw their opportunity and ran.

A few traders saw this coming and did the only natural thing — they shorted the stock.

A short on its own cannot cause a stock to collapse, as shorts are reactionary in nature. There has to be something driving the downward trend and compelling the shorts.

In this case, that downward driver was that the artificial bull market for this company’s shares had come to its pre-determined conclusion.

Don’t Feel Bad for Getting Excited

Young or old, deep down inside, we’re all still little kids.

We all harbor unrealistic hopes and dreams of sudden fairy-tale conditions descending upon our lives like a warm ray of sunshine breaking through the clouds.

So it’s only natural that when you hear big claims interspersed with industry-specific jargon, you get excited about the chances of what could be.

Those chances, sadly, are usually pretty slim when the words compelling you to act come from people with no names, no intrinsic proof to support their theories, and no viable exit strategy when things don’t go exactly as planned.

It’s a hazard to everyone — investors and non-investors alike — as these stock mechanics can persuade people to do things they never would and never have, including opening a brokerage account just to take advantage of this “once-in-a-lifetime opportunity.”

It’s also a major irritation to me because as these unscrupulous individuals insert themselves into our industry, people like me inevitably become associated with people like them.

Talk to any professional investor, stock analyst, money manager, or even hedge-funder, and they’ll say the same thing.

And it’s not new, either. These financial industry barnacles have been around since long before the Internet became a marketing tool.

Martin Scorsese and Leonardo DiCaprio made a movie about one of the most famous mechanics of all just last year.

wolfofwallstreet

However, I do want you to take at least one positive from all this: If there wasn’t money to be made trading highly prospective development companies, these mechanics would never bother using it as a cover for their nefarious dealings to begin with.

Be vigilant, be scientific, and, most importantly, know where your information is coming from — especially when it comes time for you to do your due diligence.

Fortune favors the bold,

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Alex Koyfman

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