"The Difficulties and Dangers of Investing in the Stocks of Developing Companies
or
the Siren’s Song"
(this is the title of an unfinished report I have covering the subject of investing in these types of stocks. These stocks differ greatly from your typical listed stocks of established companies, though quite a few listed stocks, such as developing biotechs, have the same issues and act similar. The fact that a stock is a pinky, is probably just a subset of all these types of companies and stocks. What follows is some excerpts from this report, as a response to Rally Cry's post:)
Rally Cry posted this: <...I came in on a hot tip and had no earthly idea what I was getting into. Here's hoping tomorrow is a better day.>
-----------------------------------------------------------
Introduction:
The stocks of developing companies have much in common with the song of the Sirens in the ancient tale of the Odyssey. The Siren’s song was so irresistibly beautiful, that Odysseus, the hero, had to plug his men’s ears with beeswax, so they could row but not hear, then have himself tied to the mast, if he wished to hear the Siren’s beautiful singing. For, if he were not bound tightly to the mast, he would succumb to their beautiful, beckoning voices, go to them, and be devoured.
The Goddess Circe instructed Odysseus how he could hear the Siren’s beautiful song, without being lured, and then devoured by them. Circe’s instructions to Odysseus were a lethal text, which, unlike ordinary words, could not merely be heard, but also, had to be obeyed, to avoid terrible consequences.
This ‘Investment Primer’ is about the difficulties and dangers of investing in the stocks of developing companies. Much like the songs of the Sirens, developing companies’ stories are often beautiful to behold, but can be deadly to the investor who tries to dally with them.
Developing companies often have stories of great promise, which may seem to have a reasonable chance to succeed. But, the investor who attempts to hold a long-term investment in an early stage developing company will likely see his investment flayed like the skins of the ancient mariners who succumbed to the Sirens.
What are the dangers and difficulties of investing in the stocks of developing companies? And, is there a way to hear their song, and participate in their promise, without having your investment funds devoured?
__________________________________________
Excerpts of some text:
_____________________________________________________________
The Difficulties and Dangers of Investing in the Stock of Developing Companies
When considering an investment in a developing company, one needs to be aware that there are a number of factors that are stacked against the investor unfamiliar with the dangers inherent in the stocks of these companies. The investor often assumes he is getting in on the ‘ground floor’ of an investment with great potential. Unfortunately, most of the time, the unwary investor, sooner or later, finds his investment has crashed through the ground floor and into the basement, with slim odds of his getting whole on his position.
Why is this, and what are the factors which are stacked against the investor drawn to making an investment in the stock of a developing company, with seemingly great potential?
This is one of the two key issues this special report will try to illuminate.
The other issue is whether there is safer method for investing in the shares of legitimate developing companies that show great potential promise?
Let’s start by examining the difficulties and dangers of investing in the stocks of developing companies, as they are great, and the success stories are few.
The Deadly Race
Think of the developing company as being in a race, a deadly race.
The developing company generally has no revenues, and significant expenses to develop it’s product or services. So, the developing company must continually engage in raising cash from sophisticated investors, over what is generally a lengthy time frame, while the company tries to transform itself into a viable, commercial enterprise, able to provide all of its ongoing cash flow needs from sales of its product or services.
The company is in a race to become a cash flow positive, commercially viable enterprise, able to exist on internally generated cash flow from its own sales before it exhausts its credibility, and is no longer able to raise cash from investors. If the sophisticated investors, which the company needs to solicit for its ongoing cash flow needs during its long development stage, lose confidence in the company’s ability to become a viable commercial enterprise in a reasonable time frame, they will refuse to provide new, needed funds, and the developing company will simply run out of cash, and will likely need to declare bankruptcy.
Let’s give some examples of typical developing companies and the difficulties they face:
Developing Biotech Companies
These companies are generally formed to develop a single new drug compound which appears to have promise. They must engage in the rigorous process of formulating and testing the new compound in carefully designed studies over a series of trial phases, and present their findings to the Federal Drug Administration (FDA) for approval to proceed to each new phase of trials. Because the trials are performed on humans, the most rigorous standards must be met to prove these compounds are both safe and effective. These trials are very time consuming, as it is often a long process just to find and recruit patients into the studies, who suffer from the diseases the biotech company’s new compound is designed to treat. The trials can be quite lengthy, often lasting a year or longer. Then, the trials must pass rigorous standards to show that the new compound is safe, and in later trials, effective, by showing statistically significant results in helping patients survive and/or improve.
The process of designing and executing the series of trials necessary to get a drug approved by the FDA can take as long as a decade, and many millions of dollars. All during this period there will be no revenues to the company, and all expenses will need to be raised from investors.
The goal of small, developing biotechs, is to show that the compound they are testing is showing increasing promise as the test phases progress, and to enter into a partnership with a big pharmaceutical or biotech firm to fund the costs of the bigger, later stage studies, which are particularly expensive. If the developing biotech company’s compound fails to show enough promise to attract a partnership with a large firm able to shoulder the final expensive trial phases, it is problematic whether the developing biotech will be able to finance the later stage testing, and the company may likely go bankrupt.
Finally, even if the company successfully partnered with a large pharma, and together they got the new compound approved by the FDA, there is still no guarantee that the drug will be a commercial success. With all these difficulties, the success rate for developing biotech companies is quite small.
The stock price of developing biotech firms are known for their high risk, and very volatile share prices. They often go bankrupt, sometimes even when their compounds have shown promise. It takes investors who are very skilled in evaluating the science underlying these companies’ compounds to properly evaluate the potential these compounds have, and investors who have such skills, know that there is no guarantee that the compound will work as hoped, or be successful in the market place.
The hope surrounding the potential of the compound the biotech company is developing, may be enough to fuel investor excitement, and fuel interest in the stock of a company for a period of time. However, such excitement always wanes over the long time frame needed to move the compound forward through trial phases, and the early investors in the stock often see their investment continually slipping in value, as more and more convertible bonds or preferred shares are issued, which are generally converted to shares and sold into the market, one way or another, and the outstanding share count continually rises.
The performance of the vast majority of developing biotech companies is quite atrocious, and it is common to see the shares of such companies dwindle to an insignificant fraction from their high points, when the stock was being promoted with great fanfare for the wonders of their new science, or compound, and the tremendous potential for commercial development it has.
-----------------------------------------------------------
PBLS was so interesting to me initially, because it had a unique approach to its development stage. It bought companies already commercially successful (though needing help to grow, or possibly at some sort of disadvantage, and thus willing to be acquired) lock, stock and barrel. Thus, PBLS had a method of avoiding the long road of developing a commercially successful company from scratch.
The other unique aspect of PBLS was that it is a pink sheet stock, not subject to the scrutiny and prohibitions of SEC registered stocks. Key to this was the ability to sell stock directly into the market without having to issue prospectuses, and without having to sell stock only to accredited investors, who are accessed through the PIPE deal sharks who drive very hard bargains.
Now, with the pink sheet veil being lifted, we are seeing how PBLS is structured.
Every time I analyze a new developing company, I find that each one is unique to some extent, but the general nature of the stocks of these companies, how they act, is quite universal.
The trick is to find when it becomes safe to hold a long term position in them, if you believe they will eventually become commercially successful firms able to exist on their own internally generated cash flow.
This is why I came here, because I look for stocks of very promising companies which have a real possibility for very large returns for many years into the future.
The jury is still out on PBLS. I believe they have the potential. However, there are unique issues here.
Regards,
Anchor
News 
Market Data 
Discover 
