Cyde Weys Musings

Maybe you’ve seen that crazy investing guru on CNBC. You know, the guy who doesn’t have a chair in the studio and is always pacing around yelling at the camera? Yeah, that’s the show Mad Money with Jim Cramer. As unorthodox as the show is, it is possible that this guy knows what he’s talking about. So I’ve decided to do a scientific investigation of how good his stock picks are.

My methodology is simple. I’ll be “buying” (using a virtual portfolio) $100,000 worth of every stock that he personally recommends in his two main segments at the start of the show. The Lightning Round segment in the middle of the show consists of people calling in and asking stock advice, and since Jim isn’t coming up with these himself, but rather, merely evaluating them, I’m going to be “buying” $50,000 each of every stock that he evaluates positively during the Lightning Round.

Then, I’m going to hold these stocks until he suggests that they should be sold (which could take awhile). At some point, I’ll just sit down and see what percentage growth Jim’s picks resulted in, and whether they beat the market. I’m not going to be playing games with trying to sell short stocks that he doesn’t like, as all of his recommendations are generally made against other stocks in the same sector, and I’ve never actually heard him recommending that anything be sold short.

Mad Money Recap is going to be very useful in this endeavor. It’s a fan site that faithfully transcribes each show and lists all of his stock picks. The basic plan is to buy the stocks after the close of market on the day that the transcript is published. For instance, I started by buying all of Jim’s recommendations from Tuesday last night.

I’m now getting more stock scam emails in my inbox than ever before. It’s really quite depressing. Are people actually falling for these?! I’ll repeat my standard advice regarding all of these stock scam spams: Don’t even think of buying spamvertised stocks. The odds are very much against you if you try to beat the spammer at their own game and try to “get in on it” before the inevitable stock collapse. Just steer far clear and pursue traditional investment opportunities (you know, investing in companies because you think the companies are doing or going to do better than their evaluation suggests).

Here’s an analysis of the individual spams:

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For some reason I just got hit today with spams for two rather similar stocks, Ten & 10 Inc. (TTEN / TTEN.PK) and L International Computers Inc. (LITL / LITL.PK). Both used to listed on major markets, but their primary form of trade is now pink sheets after their stock prices plunged. LITL is now at $0.47, down from a 52-week high of $1.85, and TTEN is at $0.02, down from a 52-week high of $4.00. Ouch! Clearly these stocks aren’t winners. But do they have the possibility to rebound? Who knows, who cares? I’m not looking at that! I’m just looking at stock spams. Any small stock that is down in the pennies range and traded primarily over-the-counter is a definite no-no, especially when it’s being touted in email spams. It’s just common sense.

Anywhere, here are the images I received in the stock spams. I do like how TTEN is advertised as “OUR TOP PICK!” Who is the “our” supposed to be, exactly? And does anyone else think these images are getting uglier over time? Just look at what they used to look like.

See my coverage of other stock scams.

This is really starting to get ridiculous. In the past two days I’ve received about two dozen more emails spamvertising QCPC.PK. They’re all from the same spammer, with the randomized word salad and the exact same image. You’d think, that since it’s one outfit doing the spamming, they could remove the duplicates from their list and not send the same person the same damn thing dozens of times, but nooooooo. It looks like the stock scammer picked a loser stock, too. Quantex Capital Corp (QCPC / QCPC.PK) is down to $0.41 from its previously touted value of $0.48. I guess it just didn’t go up as much as the spammer had hoped, so he held onto his shares and returned with a much larger-scale spam operation. His loss, well, .. it’s our loss too.

There’s also a new spam making the rounds, Fire Mountain Beverage Company (FBVG / FBVG.PK @ $0.034). It looks like they make energy drinks, which is a booming business, and in other circumstances, who knows, this could be a good investment. But right now, while the spam is being actively touted and its price inflated, is not a good time to step in. One of my friends commented, and I think this is true, that nobody out there is really stupid enough to fall for this unsolicited investment advice. However, there are people out there who see these scams and think that there must be idiots out there who are falling for this, and that there might somehow be a way for them to get in on the action (i.e. trying to buy it on the upswing and dumping it before the spammer gets rid of all of his shares). Of course, this investment “strategy” is unsound because there’s no way to obtain any information on when the spammer is going to dump his shares, and so the spammer is actually making his money off of the people who think there is an even lower rung of suckers that honestly believes this investment “advice”. It’s the “prey on the suckers who think a sucker is born every minute” strategy, and it seems to be working.

Anyway the advice is, as always, don’t ever even think of buying these touted stocks. I’ve only been examining them for a short few months, but already I can see that you stand to lose a lot of money. I’ve only even seen one stock go up by enough and for a long enough period for someone other than the spammer to make money off of it. And I’ve seen at least ten times as many stocks that just went down, down, down, and would’ve caused a substantial financial loss. The thing is, there’s absolutely no way to try to pick the “winner” from the field of losers. The game is heavily rigged against you, and the only way to win is not to play.

Financial disclosure statement: There’s no way in hell that I own any of these mentioned stocks.

See my coverage of other stock scams.

In the past two days I’ve started receiving spam emails touting the latest pump-and-dump scam stock, LOM Logistics Inc. (LOMJ / LOMJ.PK). It should be stressed that it is most likely not the company themselves running the scam, but rather, that they are the innocent victim, an unfortunate target of a stock scam. Unfortunately, none of the online finance sites seem to have any historical data on this stock, just five days of data, which doesn’t show any deviation from the recent price of $1.70 per share. I’ve included the spam image I received in my email. It came with the usual word salad designed to evade spam filters (it didn’t).

You see that promise in the spam image? This stock is about to explode! Better buy as many shares of it as quickly as possible! Errr, wait. Where, exactly, did they get their data backing up the “price target” of $5.00? I’m not stupid (and neither are any of you). This is just another made-up number, like all of the other price targets I’ve seen in spam over the course of months. I don’t think I’ve ever seen one of these things actually make its price target, in fact, though I have seen lots of them take a nose dive away from the price target. Maybe it’s not so much a price target as it is a price pipe dream, which the stocks inevitably fail to attain, like so many wannabe rockstars.

Anyway, the investing advice here is the same as it is with all of these stock scams: don’t even think of buying it. The odds are very much against you if you try to beat the spammer at their own game and try to “get in on it” before the inevitable stock collapse. Just steer far clear and pursue traditional investment opportunities (you know, investing in companies because you think the companies are doing or going to do better than their evaluation suggests). The only reason I can see that this stock was targeted is because it recently issued a favorable press release. If that press release is really doing it for you, and you really like the company, maybe consider investing in a few months when all of the spam has died down, and the stock price has returned to pre-stock-spam-inflated heights. But stay far, far away from it right now.

Other stock scam blog posts.

Terra Nova has published a rebuttal to claims that Second Life is a pyramid ponzi scheme (an allegation that I mostly agreed with). To be absolutely clear, nobody was accusing Linden Labs of operating a ponzi scheme, but rather, the fingers wwere pointed at the top moguls in Second Life, the people running the largest businesses and the private exchanges. Linden Labs is, however, guilty of hyping their game with inaccurate statements about the robustness of the virtual economy of their game.

Terra Nova’s rebuttal is simple: it isn’t a scam so much as it is that Second Life is actually a rather small economy by any normal standards, and that these investors were foolish to try to come in and try to trade large amounts of money that overwhelm economy of the game. They lay the blame at the people over-hyping Second Life, trying to make the game out to be a huge virtual economy when in fact it is really not. However, any way you look at it, whether Second Life is being run as a scheme or it’s just been over-hyped, the result is the same: its virtual economy isn’t worth bothering with. It’s simply not attractive to serious investors or venture capitalists. Until this simple fact changes, it will remain a marginalized game economy and not a real virtual economy. Yes, one person has (allegedly) managed to become a real-life millionaire, but that’s the very top of the in-game pyramid (used in an economy sense, not a ponzi sense). It’s very, very unlikely that many others can make it so big.

The conclusion is, don’t buy into the hype. Also, don’t be so quick to see evil around every corner either. But definitely don’t buy into the hype. Second Life is “a village-sized market. In fact it’s a tourist attraction-type village: the big numbers of the people you see are one-time visitors.” Its market isn’t worth taking seriously for any real investing purposes. Play it for the fun of it (if you do find it fun), but don’t go there looking to make a large amount of money off a virtual market. It ain’t gonna happen.

A venture analyst offers his take on Second Life. The short story: it ain’t pretty.

Randolph Harrison was contacted by venture capitalists who were interested in getting involved in real-money trading, which is basically about trying to make real money by trading in virtual goods. Many people are quite profitable at doing this in World of Warcraft and other MMORPGs, but it is against their Terms of Service, making it far too risky to get involved in. Besides, these venture capitalists are only interested in getting into it if there are tens of thousands of profits to be made at least, and trying to secretively trade that amount in gold on World of Warcraft is a non-starter.

So the venture capitalists set their sights on Second Life, which is one of a very small number of games that explicitly allow real-money trading. Harrison did some calculations on market exchange rates, in-game interest rates, potential arbitrage situations, investment, etc., and concluded that there could potentially be a lucrative business there. As he says, “an array of journalists, academics, and company executives have claimed that SecondLife boasts an economy complete with in-game banks, multiple currency exchanges, a floating currency exchange rate, and a burgeoning in-game commerce and business base.”

Harrison identifies the three main profit-earners in Second Life: land speculation, which is what Anshe Chung used to make her million, avatar accessories (such as clothing) that people use to customize their appearance in the game world, and the seedy underbelly, which consists of virtual “escort services” (think chat room cyber sex, but with 3D graphics) and casinos galore. Lots of businesses are flourishing in Second Life that are otherwise simply banned in real life. This is something I noticed immediately, and it immediately dampened all of my (briefly entertained) thoughts of making real money in Second Life. This is a place run by virtual mafia.

So the venture analyst started off with a (relatively puny) US$10,000 investment, because he calculated large arbitrage opportunities on in-game banking exchange rates. But the apparent gains never materialized. Player-run “banks” simply vanished when they were given a large amount of money, disappearing into the virtual ether, along with the money. “FDIC insured” is a phrase unimaginable to Second Life denizens. In Harrison’s own words:

Whole banks will disappear over night, along with your L$ balance. Private businesses will simply refuse to make good on financial contracts. And individuals, pretty much all of whose real world identities are carefully guarded anonymous secrets, sometimes even will openly default, without recourse. [...] The simple fact is, if you arbitrage a bank for over 2,000% return because they don’t understand financial engineering, don’t expect to be able to collect come payment time.

Trying to get their Lindens out of the game world at a profit proved impossible. The Linden Exchanges’ purported rates of 250–300 $L/US$ only exist for small quantities. Try to conduct large transactions and suddenly the rates become a lot more unfavorable: “Interestingly, these trades tended to net returns of right around 4%, which was the prevailing dollar deposit rate.” It’s not a real currency trading market, it’s an auction for virtual money, and all of the advantageous exchange rates are only available in small transaction volumes, almost like a scam to make one think their virtual money is worth a lot more than it actually is.

Harrison’s conclusion is that Second Life is a giant ponzi pyramid scheme. There is no profit to be made in it for the average person. It’s only the people at the top of the game world, the Anshe Chungs, those who control the large exchanges, who are able to profit from it. Everyone else coming in with a gleam of profit in their eye is really just feeding their money into the people at the top. Harrison ends with a grim, yet surprisingly accurate, summary: “There are but a very tiny handful that profit off of the Second Life economy. A handful of casino owners, large scale virtual land flippers, and brothel owners are responsible for nearly all of the real money extracted from the game. And they continue to attract new recruits to the bottom of the pyramid.”

I must admit, I was like Randolph Harrison two months ago. Yes, I lacked the venture capital, but I was attracted by the same lure: tales of people making lots of real money in the virtual realm. When I actually arrived and started to try to figure out how I could get in on any of it, however, I came to the same sort of realization that Harrison did. Which is why I use the game now as little more than a virtual physics experiment sandbox. Like any ponzi scheme, if you don’t get in on the top, you’re just a sucker hemorrhaging money, and I didn’t get in on the top.

In the past day I’ve received many more of these annoying stock scam email spams, for three different stocks in total. They’re all using the same technique: random word salad combined with stock touting in an image. There’s also coming in with random subject messages and from random return addresses. The spammers are violating email spec here, not that that’s anything new. Luckily Gmail seems to be getting them all these days, so I actually have to dip down into the spam folder to find them.

The three stocks I’ve seen being touted in the past three days are IONN / IONN.OB, QCPC / QCPC.PK, and CNHC / CNHC.PK. All of the spams make outrageous promises about future stock prices (images below), but of course fail to offer up any justification as to how these speculations were made, or what evidence there is to suggest that these companies will magically be doing many times better in the near future.

Looking at the stock trading history, you already would have lost a fair amount of money investing in Ion Networks Inc. (IONN), Quantex Capital Corp. (QCPC), and China Health Management (CNHC). By the way, does anyone else feel like these company names are ripped straight out of dystopian cyberpunk milieus? It’s almost hard to believe that Ion Networks Inc. and Quantex Capital Corp. are companies in the real world, but unless the spammers are really good (to the point of inventing fake companies), I guess I’ll just have to believe it.

Also, does anyone know why, when you type CNHC into Yahoo Finance, it takes you to Cistera Networks Inc. (CNWT.OB), which is something completely different? Frankly, this one fits even better into the dystopian cyberpunk theme, but I cannot for the life of my figure out why Yahoo is redirecting CNHC to CNWT.OB rather than to CNHC.PK.

And that stock PHYA that I wrote about over a month ago is still being touted. Talk about some persistent spamming!

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I’ve been interested in stock scam emails for awhile, and I’ve even written a few blog posts about them. Now, people with more resources than I are taking a look at them, and the findings are very interesting.

First up is an MSNBC story. It contains some scary statistics: 62 billion spam emails are sent each day! That’s ten for every person on the Earth, though most people on the Earth don’t even have email addresses. That’s double the spam since the same time last year. The story also says that a full one-half of all spam emails are now stock spams. This is a vast, vast increase over the number of stock spams from last year. Also, one-half of all spam is now image spam, which is what I’ve been seeing a lot of lately. All of the spammy details are inside the image, and then the email contains a word salad designed to pass spam filters. A bad side effect of this is a large increase in the amount of bandwidth used by spam, because it takes a lot more bytes to send images than just text.

The sad thing is, the stock spams are working, at least somewhat. Analyses of the touted stock companies show that the spammers earn an average of 5.79% for each stock that they tout. The normal investor stands to lose an average of 5.5% if they get in on the action, so a good general rule is “Never buy anything that’s being touted in spam emails.” Investigations have revealed that spammers will buy a large number of shares in stocks, wait a little bit, and then begin touting, selling off all of their shares once it reaches its peak.

A little cottage industry has even grown to track stock spams. All of this begs the question: why are stock spams so seemingly effective, and why are they rapidly taking over the spam market? The answer is simple: the stock market is an independent, external network that operates separately from the web. In traditional spams, the spammer is trying to sell something or scam money, but it needs a way to contact the spammer (which is most often a web link). Of course, any web link that is sent out in millions of spams will easily be tracked, and will oftentimes be quickly taken down by an ISP, hosting company, or even government agencies. Stock spams work because the action the spammer is soliciting to make money off of cannot be stopped through the web at all. They simply need people to read the email and then buy stock based on the “advice”, not transmit information in any way. The spammer can buy stocks mostly anonymously, and can be traced far less easily than if he was making his money by a website touted in emails, or trying to get people to contact him to pull a Nigerian scam on them.

See my coverage of other stock scams.

Earlier today I was at CompUSA looking for a cable I needed. I didn’t find the cable there, but I did find something else. I found one remaining copy of World of Warcraft: The Burning Crusade Collector’s Edition. It didn’t have a price tag on it, so I brought it up to the front, and it rang up for $70! I told the guy I wasn’t interested in buying it because it was so expensive, then he came back with a rejoinder that I didn’t expect to hear and that I wished I heard a lot more often.

“How much are you willing to pay?” I responded $50, and he accepted, and I bought it. In hindsight, I probably should have said $40 or so, but whatever. Now you may be wondering why I bought the expansion when I stopped playing the game a year and a half ago and have no intentions of relapsing. It’s simple: economics! The collector’s edition of the original game is currently selling for $400-500 on eBay. The Burning Crusade collector’s edition is currently flooding the market on eBay and is only going for about $80-90 right now, but, in a year or two, it is going to be considerably higher. The collector’s editions are released in limited numbers, and with each day that passes, more and more of them are being opened and installed, and thus, their precious goodies are being locked into accounts. WoW is an addicts’ game, and the collectors’ editions come with special in-game stuff that cannot be obtained through any other means. It doesn’t seem so absurd spending $500 for some limited edition stuff if one is playing the game for over four hours each day, as many people are.

So I’ll just hold onto this collector’s edition for awhile and sell it at a few hundred percent markup. As investments go, this one is fairly low-risk. World of Warcraft is by far the largest MMORPG out there with over eight million subscribers, and it simply isn’t going to just vanish in a year or two. This collector’s edition will thus at the very least maintain its present value. Sometimes I wonder if investing in collectibles could be a viable fund strategy. Rather than buying common stocks of companies, why not buy up Black Lotuses and their ilk, limited editions, and collector’s editions? It could theoretically work. There’s enough collectible crap out there, between the miniatures games and the trading card games to support at least a decent-sized portfolio.