Avoid Investment Scams - and Bad Advice

There is one fundamental rule on the idea generation process to get across to new retail investors:

Buy what you have researched.  Don’t buy what your friends are buying, or even worse, what someone is trying to sell you.

(For those with access to RealMoney.com, you could review my Using Investment Advice series.)

The point here is to become capable of doing the basic research necessary to make reasonable decisions.  You don’t have to make great decisions in order to succeed.  You do have to avoid making major errors, which requires a degree of skepticism toward the opinions of your non-expert friends, and modest hostility toward those selling investment products.

What led to this article was a eight-page glossy advertisement from a publication that I do not deign to name (I worry about lawsuits), about a company called GTX Corp [GTXO].  Now, maybe I need to refresh my free subscription to the direct mail preference service, which really cuts down on the amount of junk mail that I receive.

GTX Corp is an example of a company with a high valuation, and uncertain prospects.  There is no provision for adverse deviation.  It trades on the Bulletin Board, and here is its business:

GTX Corporation integrates global positioning system [GPS] technology into consumer electronics devices.  The technology allows for real-time oversight of loved ones.

 

Now, why don’t I like this company, aside from the advertisement that did not mention valuation, balance sheet strength, or any other risk factors?

• It trades at a high ratio of book, and trailing earnings don’t exist.
• It was created out of a merger with a failed mining company.
• Its recent financing this month offered equity interests far cheaper than the current market price.
• Their auditor is not a major auditing firm.
• Give the auditor credit though, they did not give them a “going concern” opinion, but instead expressed doubts.
• The stock is on the Nasdaq’s Threshold Securities list, so finding shares to short is problematic.
• Major shareholders are doing a secondary offering.
• The advertiser was paid $186,000 to do the ad by a third party.

I have no idea how good their GPS technology might be, but there are too many risk factors here to make me even consider a long position.

I am not here to beat on GTX Corp.  I am using them, and the guy who advertised them as an example.

• The advertisement had all manner of positive things to say about the technology and what it could do.  That’s fine, but what has it done?  Why doesn’t this corporation have significant revenues?
• Why does the ad use the scam language “as featured on” and “as seen in,” naming prominent publications and channels, when all he likely did was buy some slack advertisements at a late hour, or in regional editions?
• The ad compares the company to Garmin and other successful companies.
• The ad uses a bunch of emotive problems that the technology could solve.
• The ad puts forth a target price of $12 without any justification.

Buyer beware, and don’t listen to strangers giving you advice.  Cultivate networks of knowledgeable friends who are trustworthy, and avoid getting taken for a ride by slick-talking (writing) hucksters who pitch clever ideas to you.  Do your work, and buy cheap, boring ideas like I do.

Comments

[user 2lakes:]

Amen, while my copy of this junk ended up in the trash I believe I remember seeing my brokerage's name by the address. Guess I'll check and see if my broker is selling address's. A no-no in my book.

2008 May 27 09:00 PM

[secmaven:]

If you ever have an inclination to bite on a pump and run promotion go to SEDAR (most of these babies have a Canadian birthplace) and check out the numbers. A cursory review will scratch that itch to buy an you can get on with your day.

2008 May 28 10:58 AM

[jackooo:]

I sometimes save these tips and review them months later. Out of 6 tips the best one lost 68% and the worst lost 86%.
Pump and dump.

2008 May 28 11:38 AM

[William Ver...:]

The last pump and dump stock I received via email sounded so enticing until I looked at the 10Q. Mind you, this up and coming energy company had years (2 to be exact) of experience, in online jewelry!!! Even their auditer had his doubts about its ongoing abilities... no more money. Unless of course we sell more stock. How about selling a product or service, maybe? Corporate shells are cheap and reverse mergers are all popular with the swindling bunch (and their hypsters) that only wants to profit off the stock equity and to hell with the shareholder.

2008 Jun 18 01:01 PM

[b3rkut:]

you should sign up to GTX's emai list to receive their newsletter.

I receive no spam, get about 1-2 emails per month, with interesting and relevant write ups (granted, by the company). From the company newsletters I receive, it seems the company is slowly but surely increasing revenue and client base.

I haven't checked out their financials, nor do I own any shares (yet), but I think it is a company worth checking, albeit extremely closely, which I will do soon.

2008 Oct 07 09:01 PM

[b3rkut:]

you should sign up to GTX's emai list to receive their newsletter.

I receive no spam, get about 1-2 emails per month, with interesting and relevant write ups (granted, by the company). From the company newsletters I receive, it seems the company is slowly but surely increasing revenue and client base.

I haven't checked out their financials, nor do I own any shares (yet), but I think it is a company worth checking, albeit extremely closely, which I will do soon.

2008 Oct 07 09:06 PM

[b3rkut:]

And it seems they have updated their business description since May (the date of this article):


GTX Corp develops miniaturized Global Positioning Service (GPS) satellite tracking and location-transmitting technology devices for integration into branded licensee consumer products. The company’s Personal Location Services (PLS) platform consists of a matchbook-sized, location-reporting module that utilizes GTX Corp’s “always-on” Assisted-GPS tracking capabilities. At the convergence of technology, media and telecommunications - the TMT sector of the telecom industry - GTX Corp continues its efforts to advance GPS technology as it defines the PLS space. The gpVector™ system uses cellular transmission provided by our wireless carrier partner, AT&T, to deliver real-time geographic coordinates, rendered on Google Maps, to subscribers via secure internet connections. GTX Corp has more than six years in research and development, strategic partnerships, and an ongoing program of intellectual property protection. GTX Corp melds technology and form factor seamlessly to deliver the right solution to specific markets. The company is headquartered in Los Angeles, California, with an R&D facility in Palo Alto

2008 Oct 07 09:07 PM