The Yajnik Letter

Ever had a stock promotion come into your mailbox or inbox sounding like it is too good to be true? I am going to tell you why you should run the other way.

According to these promotions, they will often site that some national agency has just made a major announcement such as a massive gold discovery of so many ounces worth so many trillions of dollars.

The thing here is that the tiny company in questions bought these land properties before anyone new of what exactly was underground. So, now that this national agency has made this announcement, this tiny company is all of a sudden sitting on a nice fortune. As a result, the promotion material might say something to the effect: “every share of ABCD company you buy today could jump as much as 1,500% in the next 24 months. Don’t wait – BUY TODAY!”

So, what should you do? I say you should definitely NOT BUY. Why? Generally, in these situations, the person sending this promo has taken a position in the stock and a fee to market it to simply create some hysteria and a jump in the price so they can exit from their positions at a nice profit.

If you were to take a look at the historical prices, you might see that the stock has already jumped 1,500% over the past year, which is when they probably started to mass market the company shares. If that’s the case, the promo worked.

Surprisingly enough this is legal because if you read at the bottom of the promo, you will see that the promoters have disclosed how much they paid for the advertisement, any fees they get from marketing these shares, and how many shares they own.

So, be wary of this type of research/marketing. They try to come across as legit equity research but they are simply marketing at its finest. Really, this is no different that Wall Street firms pushing out bullish research reports to lock in lucrative investment banking relationships or brokers using “buy” recommendations because they get extra commissions when they sell that particular stock.

With that said, I generally ignore most bulge bracket banking research reports because they is almost always an ulterior motive. I prefer independent research where there are no ties to banks or other business relationships.

I want you to be able to distinguish the difference between biased research and independent research. The easiest way to do this is to say to yourself whether the writer has anything to gain if you take his/her advice.

-Samir