Cautionary Tale On 'Hot' Stocks And Confident Bets

by: Danielle Park, CFA

Innate Immunotherapeutics (OTCPK:INNMF) is a small Australian biotech company whose main drug is an investigational treatment for multiple sclerosis. New York House Rep Chris Collins is a board member and was Innate's largest shareholder with a position valued at over $45 million earlier this year. Collins was very vocal in recommending the stock to friends, family and colleagues and bragging of how many millionaires he'd made by promoting the company:

"I talk about it at every turn, just like you talk about your kids hitting a home run and your daughter getting into law school," Collins told The Hill earlier this month.

Trouble is that the drug failed all of its 93-patient trials and this morning the shares fell 97% to 4 cents from a high of $1.20 in January. Collins' $45 million is now trading at less than $1.4 million and his followers who bought in later have fared even worse. See: House Republican's favorite biotech stock just plunged by 90%:

At least four of Collins' Republican House colleagues followed suit, buying into Innate in January when the company traded at an all-time high of about $1.20 per share. Collins' chief of staff, Michael Hook, is among Innate's top 20 shareholders, as are two of the congressman's children.

Word to the wise: whenever someone recommends a 'hot' investment tip, your risk radar should be on high alert. Tale as old as time. Usually the person is already holding and looking for others to 'buy in' to push share prices higher and/or allow them to sell their own holdings. Often the person may totally believe they are genius and are giving you a hand up. Well-meaning delusion and hubris are very common.

If you do decide to bet on 'hot' tips, the primary question should not be 'how much can you win' if it succeeds, but rather 'how much can you afford to lose' in the overwhelming likelihood that the bet will fail. Eyes wide open. Speculative gains usually end equal and opposite in the other direction. Here's the chart.

Disclosure: No Positions