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How Small Caps and AIM Companies Manipulate Investors

How Small Caps and AIM Stocks Manipulate Investors
Written by Andy

We see so many penny shares over the years and it is so easy to get drawn into the potential, jam and ramping. Numbers start to get written down on spreadsheets and calculations done on how much the shareholding will be worth at x, y and z price.

“I am going to be rich! Rich I tells thee, rich beyond my wildest dreams!”

Ultimately though the near majority end up causing value destruction with many dreams completely dashed. Naturally there are trading spikes and moments of euphoria where short-term momentum is so fierce, many market participants can profit. That is what I normally try to do with most shares, especially any penny punts.

One of the things I’ve learned (the hard way) over the years is that management is a key variable, one that is really hard to judge, but one that can make or break a company. It seems competent management is a rarity. Often there is a big variance between management interests and shareholder interests. Chronic share dilution often kills any share price appreciation for companies with otherwise attractive projects. There are lifestyle companies. And there are companies that never make any progress because they are starved for capital. A good management team often is the difference between success and failure. Unfortunately, we usually don’t figure that out until we’ve lost most of our investment.

The Amount of Deceit in the AIM / Small Cap Market Absolutely Staggers Me

The amount of deceit in the AIM / small cap market absolutely staggers me. The lack of deterrent has to be the reason why here, there are so many directors who feel they can do whatever they like with the only people suffering the consequences being the shareholders.

The problem is, people see the flotation price and the subsequent rallies which inevitably happen, and then make the mistake of forever indexing their sense of ‘value’ and what looks ‘cheap’ or ‘oversold’ to those initial prices, which in themselves might well have been wildly optimistic or at least off the mark.

There is an endless supply of retail investors who are ready to buy into a story. Whilst some retail investors are savvy (or hardened), many are naive, undereducated or crucially lack experience within the markets. But they are important in so far that they effectively provide the necessary ‘churn’ and liquidity within the marketplace and help enable placings to get away and for larger players to turn stock over (imo). Put in a more blunt way, I think they are often seen by ‘big money’ as cannon fodder.

Always remember that analyst targets have no requirements, no process, nothing. They can be bought and paid for, used to pump a hedge fund’s position and provide exit liquidity, or used for literally any purpose with no oversight. It is completely legal.

And WITHOUT making reference to VOX Markets here, in my opinion there are many outfits whose role it is to promote stocks, provide company chats, interviews and commentary in order to engage such retail investors and so help in that liquidity.

I’m a broken record but in the last few months we’ve seen some, what I call ‘poker chip’ stocks (those going bust/up for sale) being relentlessly pumped by rampers on bulletin boards and social media. Be careful who you listen to, for every #BUMP that works, there are 20 like ##ITS #REVB #DDDD #MADE #MEAL etc   But becoming a penny share (through dilution) is in many cases a realistic outcome for many companies with high rates of cash burn, looking to break into an emerging market. It is part and parcel of the friction and challenge of ‘getting there’.

What mildly annoys me in the interim is the likes of people such as Paul Hill and his, imo, pollyanna commentary. Canaccord, likewise, seamlessly reigning in their forecasts and putting out new ones. Do they receive any form of direct or indirect compensation or remuneration for commenting on individual companies?

Also, be very wary of conflicts of interest.  For instance one company Dekel Agri-Vision Plc (LON: DKL) that I follow has had a miserable performance over the last year.   Dekel Agri-Vision Plc is mainly involved in palm oil agriculture in West Africa. I think the issue here is that it is much easier for the board to create their wealth by setting up lots of holding companies, and various organisation structures, consultancy services etc – that enable them to entice investors and through various means transfer the wealth to themselves – and it is easier to do that than actually get into the hard work of making the business really generate shareholder value and profit.  Every year over the period you have invested (and me too) the board would have taken salaries, share schemes, invoiced for consultancy services, set up holding companies to generate ‘ideas’ for DKL and the like to purchase (i.e. buy off themselves) – all of this is really just transferring value and wealth to themselves from us – they therefore have little incentive to really make the company profitable and genuinely grow.  When i first bought in at DKL I think one of the directors there; Lincoln had circa 1m shares – it’s now over 5m – he’s doing very well out of it without having to spend anything personally or actually deliver any results.

Dekel Agri Vision Share Price

What’s interesting is that the market – in strong contrast – may start to firmly say ‘no’ to more rights issues if the present market conditions persist.

About the author

Andy

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