Okay, so you’ve been investing for a while. You’ve got your Scottrade, Ameritrade, or E-Trade account.

Maybe you even have your own live broker who calls you in the morning with big new ideas.

And of course, as an investor, you probably do a lot of your own research.

You read articles on Yahoo! Finance and the Wall Street Journal. You listen to Jim Cramer. You wonder what Warren Buffett’s next move will be. And you watch movies like Wall Street and think to yourself that in some small way, you’re living in that same world.

Well, let me tell you right now that the world you think you’re living in isn’t what you think it is…

It’s a real jungle with all its own predators. And for the most part, the smaller animals either get eaten or are lucky just to survive.

Now, I know that doesn’t sound so great. But the fact is, to guys like me — guys who make their careers and reputations from their track records and their abilities to give their readers good information on a consistent basis — the fear that the investor’s jungle breeds would-be investors is one of the biggest sources of annoyance there is.

It’s more than an annoyance, actually. It’s a liability and a detriment to business.

It’s also a detriment to your ability to profit. And it gives the whole industry a bad name.

Now, let me back up a minute. Microcap stocks, or penny stocks as they’re known colloquially, are actually some of the fastest and strongest-returning investment instruments available to public investors today.

In fact, next to venture capital (VC) investing, penny stocks have the potential to bring in the highest percentage gains — period.

The problem is, sifting through the garbage to find the gold isn’t easy.

I would say that the garbage-to-gold ratio is somewhere in the neighborhood of 10 to 1. But before you scoff and close this page, let me add something to that…

The last portfolio I ran consisted of nothing but penny stocks. And of the eight positions I had at last count, all eight of them were up in the mid-double digits.

Mid-double digits and not one of those stocks had covered for more than two months. Two of those positions had already been closed, which means that readers had realized gains and cashed out.

No tricks, no creative math, no momentary jumps followed by catastrophic collapses. These stocks rose, rose fast, and stayed there.

And the craziest thing is that each of the winners is still, by all accounts, in their early growth stages.

The real gains, the kinds that come when a development-stage company finally starts to grab up market share, are still in the future for these companies.

Think it doesn’t happen often?

Think again. Every big name out there, from Apple to IBM, was once a startup. Not all of them were public that early, but what difference does that make?

Those who invest early in future global brands — whether those investments were made through a hedge fund, a broker, an investment bank, or through E-Trade — get rich. Very rich.

And I think it’s about time that people without access to Wall Street bigwigs or who aren’t already filthy rich and just looking to galvanize their fortunes had access to real, honest, timely, actionable information.

The first step to doing that? Exclude all the pretenders, which is what I’m here to help you do today.

Whether you’re aware or not, you’ve almost definitely run into a particular breed of investment advice circus performer while wandering the internet.

I call them “stock mechanics” — a term that I borrowed from professional card playing.

You see, in poker and blackjack, guys who either sneak cards into the deck or count them are referred to as “mechanics.” They appear to play, but in fact, they’ve been cheating the whole time.

And it’s these guys who 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 up 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 few ways that you can distinguish a real stock analyst and investment director from a mechanic…

Hi, My Name Is Stock Analyst!

You’ll never hear their 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 to follow 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’s no actual analysis that goes into 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 names at all.

Take, for example, a company that came on the radar of the Securities and Exchange Commission (SEC) last summer.

Cynk Technology Corp. (OTC: CYNK) is a supposed social network that’s 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, billion with a “b”:

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 to offset about $50,000 in debt.

Anybody who’d done even the most basic research would have known most of these things and stayed away.
But thousands didn’t, which allowed 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 to get 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’s an actual email from one of these mechanics from earlier 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 saw 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 can’t cause a stock to collapse because 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 predetermined 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 that descend 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.

But sadly, those chances 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 — because these stock mechanics can persuade people to do things that they never would and never have. That includes 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’d all 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.

A few years ago, Martin Scorsese and Leonardo DiCaprio made a movie about one of the most famous mechanics of all time…

But I do want you to take at least one positive from all this: If there weren’t money to be made from 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.

That’s all for now.

Until next time,

John Peterson
Pro Trader Today