One Step Ahead

[jbgoodtrader]

For us CMKX'ers, here is some interesting reading that I found while searching Google.

It has to do with Speculative Stocks like CMKX.
I'm not pumping or bashing anything here...just thought this might help someone...it's interesting. No I haven't read the book.

Here is the link...
http://formeraboutguides.com/investingcanada/library/weekly/1999a/aa032299.htm

Here is the excerpt...

The Life-Span of a Speculative Stock
Bunka goes on to discuss what he calls "the most important component of speculative investing", cycles. Speculative companies have what Bunka calls life-spans and frequently more than one of them. Here is a short account of a life-span of a typical mining company as described in the book. Although it is easy to dismiss Bunka as a cynic from this account, I think it reflects a knowledgable assessment of what really goes on.

A company starts with an idea. It takes about a year from that point to get the company up and running. During that time the "directors and other insiders issue themselves 5 million shares of seed stock at $0.01 per share" The management also develops a plan to acquire properties, conduct research and so on. And they start to sell an additional three million shares "to friends and close associates who are willing to spend $0.15 per share in order to get a closer look at the company." Along with the $50,000 invested by the directors,this brings the company treasury up to $455,000.

The stock is now listed and "since virtually all of the shareholders are of the same mind, it is easy to move it to $0.50." Over the next six months "the story is peddled by brokers whose companies are taking part in this public financling." Another two million shares are sold at $0.50 raising a further $1 million.. Costs and commissions over the previous 18 months have eaten up the original $455,000 leaving the company with 10 million shares issued and $1 million in the bank.

Now the first geophysical results come in and "Surprise! Surprise! Anomalies are discovered that warrant further investigation." The company spends its money on drilling and six months later "results start to trickle in." Disappointing results cause the stock to pull back but "just in the nick of time, the final two holes produce very good results that have investors foaming at the mouth."

As the stock starts climbing towards $2.00, the insiders sell half their stock. The company issues another three million shares at $1.50 and "outsiders leap at the chance to participate in this momentous story and lap up the new stock."

Then, as "investors realize that it will be six months before the story can be spruced up again in the next drilling season, a slow, aimless decline begins."

Six months later, with additional properties and drilling programs under its belt, "the drama repeats itself" and the stock, which had settled to under a dollar, starts to move up again. The stock climbs back to its former highs, but drilling results are "inconclusive" and "insiders take the hint and sell the rest of their stock." When the disappointing final results come in, the outsiders are left holding the bag.

The story gets worse, says Bunka, as the insiders now have no stock themselves and thus, "no interest in doing anything constructive with the company. Only if and when the stock finally declines back to around twenty cents are they interested in creating a new story."

Although the details may vary, this is the basic life cycle of a speculative stock. Not for nothing Bunka calls his book an outsider's guide. It is of key importance for outsiders "to locate where the stock is in the life span cycle before even thinking about investing in it."