Investment Survival Guide: Staying Out of the Murder Holes

(Josh Brown / RegisteredRep) “There are some stock market land mines that will invariably destroy anyone foolish enough to stand on them for an extended period of time. .. Until you’ve been blown up by a few of these murder holes yourself, it’s hard to recognize them. Below is a list of the dark alleys you never want to wander down for your own future financial well-being. .. These alleys are strewn with various land mines, any of which could become your very own murder hole at any time. You probably won’t listen anyway, but don’t say I didn’t warn you.”

SPACs – “According to Reuters, the last big wave of 57 SPACs that debuted at the height of the credit bubble in 2007 had raised a combined $11.3 billion. That’s a whole lot of “dumb money.” The best thing that could’ve transpired for those 57 companies would have been the return of cash that occurs when the clock runs out and a deal hasn’t been consummated. In fact, there were a few hedge funds involved with some of those SPACs that were forcing that dissolution to occur using the voting power of their stock positions. .. If it weren’t so true, it would almost be laughable how horribly and slowly these things die. And by the way, many of these SPACs have been China-related in recent years. For investors, the China-SPAC combination is like being beaten up after school and then coming home to find that your parents have moved away without telling you. .. And just so you know, the investment banks that make these stepchild IPOs are almost always connected to an aggressive brokerage sales force. How else could $100 million be raised for such a hare-brained scheme?”

Chinese Reverse Mergers – “The short sellers who have attacked and unmasked the Chinese RTO fraud machine have done investors a favor in the long run. I’ve advised people to avoid the entire China stock sector until the companies grow up a bit and start acting like professionals. After all, if the legendary John Paulson can be taken in by these charlatans, what chance do you have?”

One-Drug Biotechs – “The vast majority of drug trials fail to satisfy the FDA, and approvals are the exception, not the rule. .. If you must own biotechnology, try to go with a larger company that has several drugs on the market or in development. It may not produce a 10-fold return, but it also won’t vaporize your portfolio on an FDA setback.”

Private Placements – “So I’ll tell you what happens and what will always happen when retail brokers bring their clients private banking deals. By the time a company is desperate enough to go to broker/dealers for funds, it means that it is already at the end of its rope. The retail brokers are offered a 10 percent commission to show the deal to their clients. They are also promised warrants and stock options should the company end up going public. (It won’t.) This exorbitant compensation for the brokers is a huge red flag. .. The higher the commission or selling concession a broker is paid to sell a product, the worse that product will be for his or her clients. Brokers take note: selling a client a private placement that pays you a tenth of that money back is the same thing as telling your client to go f*%k himself. And by the way, the more interesting the company, the more dangerous the private placement offering.”

Other investor traps to watch out for:

  • “Oil and gas limited partnerships. (If you’re being cut in on them, the wells are dry.)
  • Principal protection funds. (They always come out after the market’s been killed and cap your upside on the recovery.)
  • Insurance brokers selling asset management. (Does your hairdresser also repair the roof on your house?)
  • Stockbrokers selling guaranteed-return equity-linked annuities. (Yeah, that’ll end well.)
  • Reverse convertibles and other structured products. (They will pit you against both the market and the banker — good luck!)
  • Brokers with one day left in their pay period. (They will call you with the news that “we need to rotate and move some things around.”)
  • Brokers with thick New York accents and Boca Raton area codes.
  • Anyone who claims to have a “system.” (Why? Because there is no such thing, and if there were, you would be the last person to hear of it.)
  • Anyone who calls himself a “financier.” (He’s guaranteed to be full of sh*t and probably wears dress shoes with no socks.)
  • Financial advisors who self-clear or self-custody client funds. (Always be sure there is another pair of eyes on your money, preferably a large corporation’s.)
  • Currency brokers and forex sites. (Nobody knows anything; this is all highly leveraged speculation, and the brokers are actually trading against you when you take a position.)
  • Managed futures funds. (The fees are so over the top that your actual return will look nothing like the advertised return.)
  • Movie investments. (The latest telemarketing scam; no studio worth investing in is going to unleash an army of cold callers to raise funds.)
  • Closed-end fund IPOs. (These funds should only be bought at a discount in the secondary market. Within 90 days of the IPO, the “penalty bid” phase ends and brokers can freely dump shares while keeping their commissions — you will be down 15 percent in a blink.)”

Full Story: Staying Out of the Murder Holes (Joshua Brown / RegisteredRep)

And let’s not forget to mention double and triple ETNs (Exchange-Traded-Notes) that will evaporate your portfolio faster than you can say “WTF“?!… 

Full Story: Collateral Damage: TVIX’s Fall Could Have Broader Implications (TVIX, VXX)


by on Mar 22, 2012, 6:29pm Share
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