When you run a website that contains Google ads you constantly have to watch out for penny stock hustlers promising ludicrous returns. They’re generally “pump and dump” operators who push up the price of thinly-traded stocks and then bail, leaving their hapless clients holding worthless paper. Dirtbags, in other words.
So it was with some interest that I heard of a young guy named Timothy Sykes who tracks the pumpers and shows clients how to bet against them. We did a quick Q&A last week; here’s an edited transcript:
Dollar Collapse: How did you figure out that penny stock scammers were easy targets, and how did you learn to prey on them?
Timothy Sykes: I actually made my first million buying the stocks they were pumping and only when that strategy stopped working did I get into short selling the same pattern on the way down…that’s the beauty of pump and dumps, you can either buy the pump or short sell the dump, or when you get good enough, trade the stocks both ways.
It’s far easier to buy on the way up, but after a decade of trading these shady stocks, I am really only comfortable betting on their inevitable failure as experience teaches me they all fail eventually.
DC: Walk us through some of your biggest trades.
TS: When you make millions of dollars over the year by adding up tons of $5,000 and $10,000ish profits, there’s a lot of great trades to discuss, but I can think of two that really stand out, both are detailed in my book An American Hedge Fund.
Back in 2000, when I was a college freshman, the pumps were truly grand and I was on my way to earning $700,000 from my dorm room simply by buying microcap stocks when they broke out to new highs on strong volume. A simple technical pattern worked like a charm over and over and over and I wasn’t even very good at holding for more than 10-20% when in fact these stocks were spiking 50%+ within hours or days AFTER the technical breakouts occurred.
One such company was Illiinois Superconductor (ISCO at the time) which claimed to invent a product that would extend cell phone reception. The stock had tripled from $5 to $15 when they announced on a Friday morning press release they would be featured over the weekend on national news. The stock surged to the $17s in anticipation of great exposure and I bought 10,000 shares at $17, which was ¾ my net worth at the time, with the goal of selling into a Monday morning gap at $19, $20 or $21.
The news, using a very scientific approach, naively hyped this as the next Microsoft and I couldn’t wait to get out first thing Monday morning. I was using Scottrade back then and they didn’t have premarket trading so as the stock rose 19, 20, 21, 22, 23, I could do nothing but wait for the opening bell and when I finally got out at 9:40am (it took 10 minutes to execute since the trading volume was so overwhelming), I had sold my shares above $29 for a gain of $123,000. I celebrated by taking my entire dorm out to dinner that night. The best part was that I didn’t have to rush out as the stock nearly touched $40 the next day before gradually fading into oblivion as the product bombed.
So I was fortunate not to know about short selling then or else I would have surely been squeezed into bankruptcy before being proven right. But by 2004 I had learned how to short sell the very same pump and dump-type patterns and when the Asian tsunami hit in late 2004, I was ready to short any and all pumps and there were several.
I focused mainly on short selling a company called Taylor Devices Inc. (TAYD) as the stock had surged from $2 to $6 on rumors that Asian governments would use their earthquake absorption technology. I thought that preposterous given the company’s near-bankrupt state and shorted heavily in the $6s expecting to cover in the $4s. Unfortunately I learn the hard way that hype, like that with ISCO going to $40 before dropping back down to $15 within a week, can last longer than expected and I covered in the $7s and low $8s for a $180,000+ loss.
I know, I know, this is supposed to be great trades, but this was one of my best lessons and it got even better when I stuck to my guns and shorted again the next day in the high $8s and covered in the $6s for a gain of $250,000+ locking in total gain of $70,000, a horrible way to make that money, but a very decent haul for my small hedge fund at the time.
Now I have refined my strategy to focus more on paid-for stock promotion and I don’t go for home runs nor do I strike out so much, but it’s amazing that these patterns are still the exact same. I wish there was somebody like me teaching back when I first started as I would have enjoyed much greater success and not made so many bone headed trades!
DC: How do you short penny stocks? My broker won’t me let short anything under $5.
TS: This is the biggest obstacle to implementing my strategy and the problem is that most brokers out there absolutely stink for short selling penny stocks because they don’t want their customers partaking in such a “risky” strategy. That said, if you learn the rules I’ve learned the hard way over the years, the risk is lessened, so I use and recommend Thinkorswim, Sogotrade and Interactive Brokers. Sometimes all three brokers have shares to short, sometimes none of them do. Because I know the odds of successfully short selling a pumped up microcap or smallcap company if timed properly are around 80%, I try to reserve shares to short every day. I even came up with the term “ALFSS” which means Always Look For Shares to Short as it costs nothing but a few minutes to ask your broker if they can find shares to short each day.
DC: How do you track the pump-and-dump artists?
TS: I use several screens on StockFetcher.com and StockCharts.com and I also use great websites like StockPromoters.com and StockReads.com which spell out the compensation various promoters receive for their pumping these carcass companies, highlighting only the upside, and exaggerating as much possible, ignoring the reality that any company that is willing to pay six or even seven figures for stock promotion stinks more than cheese left out of the fridge for three weeks.
Over the years it gets easier to spot the hype and manipulation, which is why I want to get people started learning ASAP so they can become master detectives like me.
DC: Are the pumpers adapting to your strategies?
TS: No, lucky for me, penny stock CEOs and stock promoters are some of the absolute dumbest people you will never hope to meet, they are truly mental midgets. There was a CEO who had lost his medical license and in a blog post aimed at trying to discredit me, accidentally admitted to an SEC investigation just a few days before the SEC halted their stock!
The SEC has and will continue shutting down the most blatant frauds, but manipulation and pumping and dumping will always exist in some form or fashion. I will always be around to teach people to profit from it legally, by short selling these frauds and pumps and even buying them on the way up if you can be quick. Modifying a famous Jesse Livermore quote slightly “The frauds change, the players change, but Wall Street manipulation never changes.”
DC: What do you offer people who would like to try this themselves?
TS: I’ve created 10 comprehensive instructional DVD packages with over 100 hours of instructional content from the basics to advanced, the right and wrong trade setups & chart patterns, how I research and spot red flags and frauds, what data is important, etc. I also have 4 newsletters so everyone can follow along each day as I present potential trade candidates and share my real-time trade alerts.
But if I can teach people one thing, it’s to never trust anybody in finance so rather than just hearing me talk about my strategy, sign up to my free video lesson series so you can learn from the specific trades and patterns themselves.
Full disclosure: The above link is to an affiliate program that pays for referrals, so before buying a video or subscribing to a service do enough research to be sure you understand what you’re getting.