Picture this: A famous rapper, most famous for surviving injuries that would kill most people, starts to use Twitter, one of the most popular methods of communication to come along in recent years, to promote a small company’s stock. It turns out that he isn’t simply spreading news about a company that he feels does good work, but rather holds millions of shares of the stock and is attempting to drive up the price in order to cash out. And drive up the stock price he does; the ticker price more than triples after a few short tweets from our rapping friend. The kicker is that the stock itself is not that solid of an investment, having shaky loans and losing business quarters on its books; after a short boost due to the rapper’s promotion, the stock has resumed its decline.
So, is this a story about the hazards of investing in penny stocks, my attempt to show you how inexpensive investments can be manipulated by unscrupulous ‘investors’ and boosted to undeserved highs just in time for those who are promoting them to cash out and laugh all the way to the bank? Oh, how I wish that were case; I can’t claim to come up with story this good. Instead, apparently 50 Cent did exactly what I just described; he bought millions of shares of H&H Imports, a small company that makes its money (or rather, loses rather prodigious amounts of money) by buying and selling women’s handbags. He then tweeted up a storm, talking up the stock and encouraging his followers to buy it, bumping up the price of this little stock and enabling his investment to increase in value by millions of dollars.
Again, this is too good to be made up. It combines one of the most common sort of frauds in existence (a pump and dump plan), a big celebrity, Twitter, and a down trodden penny stock that otherwise, probably wouldn’t be on anyone’s radar. I don’t know that I could have come up with a better cautionary tale if I tried.
The Lessons From This Story
There are so many lessons that someone who’s spent the past two plus years studying money, personal finance, and investing can draw that it’s nearly scary. I almost don’t know where to begin. Let’s start with one of the most obvious lessons:
-Beware of people promoting specific stocks or other investments: The first thing you should draw from this sordid little tale is that there are frequently motives beyond enriching you that writers and other commentators can have. If I, or anyone else for that matter, starts to pimp (to stick with the rap vernacular) a particular company or investment, you should view those recommendations with an extremely skeptical eye. Yes, the promoter might genuinely believe in the company and think it’s a good investment, but there is a possibility that they are trying to manipulate you into playing the greater fool and paying a premium for an investment they will happily leave in your hands. Of particular concern are…
-Watch out for those penny stocks: Penny stocks, like those issued by H&H Imports, are particularly susceptible to use by fraudsters. Unlike the stocks of large companies like Google or Ford, penny stocks tend to be much lower in price, much more lightly traded, and have much less media coverage from legitimate sources. If 50 Cent (or anyone else seeking to do something like this) wanted to do a pump and dump with a large company like Exxon, they’d need to put a lot more money into buying up shares, and would have a lot harder time generating enough buzz to substantially boost the trading prices. When dealing with penny stocks, particularly penny stocks recommended by others, you’ll need to do all due research, and then some more on top of that; even legitimate penny stocks might be unwittingly used as pawns in a scam.
-Be skeptical about suggestions on social media sites: While we’re on the subject of skepticism and scams, let’s take a moment to note that social media has its own role to play in some of the latest scams. While most of us have gotten used to the fact that our email addresses may be targeted by scammers promoting everything from specific penny stocks to generic [email protected]@, we don’t yet have the same level of concern about comments and suggestions provided through social media sites like Facebook or Twitter. After all, we think, all the people we contact there are our friends; why would they try to deceive us? Unfortunately, we need to keep up our vigilance; whether due to their own nefarious purposes or because they genuinely believe the promoter’s pitches, you can find your friends and followers sending along scams to you. Remain skeptical, even about offers your own mother sends to you.
-Do your own research: Of course, it wouldn’t matter how many tips you got, or how questionable some of them are, if you make a point of doing your own research on any tip that you get. Some preliminary research on H&H Importers could have revealed the deficiencies on their books and the other problems faced by the company. If you opt to invest in individual companies, one of your first steps will be to learn how to interpret the financial information available to you, starting with some of the commonly used valuation ratios that professional analysts rely on for their own investment recommendations.
These are some of the major lessons I hope got reinforced by this particular incident. There are other lessons, like ‘Don’t trust 50 Cent for stock recommendations’, but if you can keep the above suggestions in mind while reading through any investment suggestions from 50 Cent (or any other people you may be following on Twitter or other social networks), you’ll be much better off. Good luck to all of you as you go about investing! (Including you, 50 Cent, if you happen to read this.)