Understanding the London Speculative Markets and the Secrets of How to Profit From Them

The whole of the AIM and small cap game works only because of promotion. This is the most important ingredient and it is essential to understand this.

Historically, small caps were promoted by financial writers in the newspapers and tip sheets and by brokers either face-to-face with clients or in telephone conversations. The writers and brokers usually were informally compensated, often quid-pro-quo, and that tradition continues today, the only difference now being the participants. Financial writers and brokers are still actively promoting shares, but others now have equal if not greater importance.

The big change is that previously there was a certain quality filter on the information being communicated, since the writers and brokers would not have been employed without them having a certain level of knowledge. Now anyone can have an audience for their opinions, regardless of their ability. And how can someone with no knowledge themselves know the difference?

Most people now obtain their information from the Internet and a new world has opened up in which investors can interact. The earliest forms of electronic investor communication were the bulletin boards, of which the main ones in the UK are ADVFN and LSE. Now, if everything is in balance, they should display alternative views and provide investors with a reasonable perspective of other investors’ opinions. Sadly, dissenting, and often truthful, voices tend to be suppressed, either by being shouted down by other posters, perhaps just other accounts, or by being removed by the administrators or moderators due to complaints from those other posters and / or accounts. Sometimes, the companies being discussed are PR clients of the platform, in which case it is possible that the administrators and moderators are less than independent. Personally, I view the commentary on these boards as worthless, but they do have a huge impact on many investors. Much is blatant PR often being posted by the company or those retained either directly or, more usually, indirectly. A significant part of the information being posted is deliberately false or misleading and often there is little or no counter to that.

The bulletin boards have to a certain extent now been superseded by the social media platforms, of which the most important for shares is Twitter, although the boards do remain extremely popular. A similar situation to the bulletin boards does prevail on Twitter, with promoters trying to shout down or bully those posting opposing views, however, this is less effective, since on Twitter the administrators and moderators will not come to their rescue and take down the posts they do not like and / or ban the truthful posters.

In both venues, the idea of the promoter(s) is to create interest and excitement, leading to buying by investors. Ideally, these investors once they have bought the shares will in turn promote the stock. Whenever the price falls, those touting it claim to be topping up and a club or team like feeling is encouraged amongst investors, particularly via groups, to discourage any selling. Messaging services such as Telegram also are used for this purpose. The most powerful emotion being exploited is FOMO (fear of missing out) and people succumb to this time and time again. Like the bulletin boards, the majority of the information posted by promoters on social media is false or misleading.

Another major source of information for investors to which they afford much credence is interviews. Unfortunately, since they invariably are paid for, virtually all of these are staged, with pre-agreed questions and the company reviewing and editing the interview prior to broadcast and distribution. The information contained in these interviews often is misleading. They also provide further material for the bulletin board and social media promoters to use, misinterpret or distort.

In similar vein, many of these types of companies also word RNS announcements in a way that can be deliberately misinterpreted by promoters. It is very important to read the whole RNS, word by work, looking for any ambiguities. If you can spot them, then you can readily see what the real story is. I shall give examples of these later in the book.

Investor evenings, presentations and lunches also belong to the same category as interviews. They can build up a false trust between investors and directors, who for the main are essentially professional salesmen. Investors can feel privileged and often think they are privy to advance information as a result, but this is rarely the case.

Officially, public issuers use and directly engage IR companies and PR web sites, but the meaningful impacts on price and volume are achieved in other ways. These companies and web sites often interrelate to commentators, who profile themselves as independent and uncompensated, even though they are paid. They are self styled stock market experts who purport to provide informed opinion, although the only criteria for qualification as one of their stock selections is a cash payment. Nevertheless, they do have influence and reinforce their credibility between them by interviewing each other. I am sure you will be able to spot them.

Most powerful, although not much used in the UK, are large email blasts, which can create millions of dollars of volume a day for US micro cap stocks. British promoters generally can not bring themselves to stomach the several hundred thousand costs for an effective one, although this method has occasionally been used for Australian companies also traded in London.

Disclosure of compensation is one of the cardinal rules in the US and is rigorously enforced by the Securities and Exchange Commission. Their view is that it is important for investors to know whether the opinion is genuine or paid for, but in the UK it just does not seem to be an issue, or even that important.

On to the actuality of the situation. AIM and small cap companies essentially are promoted on the basis of lies and mistruths. The companies do not actually lie in their regulatory (RNS) announcements, but they can write them in a way that allows people to mislead themselves, or leave ambiguity to allow for alternative, more positive, interpretations by promoters. It is rather sad when people believe these promoters and even convince themselves that what they are being told is true, and tragic for them when, as always happens, the truth eventually comes out and they lose their money.

Very simply, do not believe any of it and do not allow yourself to be persuaded of the merits of a company to the extent that you believe it is a long term hold. These companies are for buying and selling, not for holding beyond the short to medium term.

For our purposes, though, it is better to see strong and effective PR engaged. The poorer ones, who are the majority, often can not generate the necessary impact to ensure the required excitement and get the share price moving. The level of the people involved is a fair indication of the level of the promotional quality of the company’s management and project.

Incentives for the promoters usually are in the form of cash and often warrants. Normal payments to official IR and PR outfits will be made directly by the public companies, but cash and warrants for the unofficial, non-disclosed, PR will usually come from the party controlling the company, often working in tandem with one of the brokers.

As a side note, it is very much worth keeping an eye on promoters’ activities, since they can often flag up a forthcoming placing, which as detailed previously can usually be confirmed by a quick review of the company’s cash position. It is essential to avoid these.

So how do they go about it? There are two main audiences: those who believe in fundamentals and look for what they think are good investments; and those who are only interested in whether the price is going to go up, preferably in the shortest possible time scale.

Looking at the first group, they are easy to manipulate. The company can only publish facts, but the promoters can do “research” and since 99.9% of their audience is clueless regarding petroleum geology, they can as good as make it up. One of the favourite techniques is “closeology,” which essentially is used to “prove” the merits of the company’s acreage by its proximity to producing tracts, or other acreage owned by well known companies. There will be good reasons why the acreage being promoted has not been drilled or permitted / leased by other companies, but this inconvenient point is ignored.

It is important to understand that even within an oil field, some parts are productive and some are not. Oil and gas generally is contained in undulating sands of varying thickness. The geologist aims to map these with structure and isopach maps. These will show both the prospective and non-prospective areas. Prospective areas are leased or permitted by real oil companies, non-prospective areas are not. Therefore, it is quite easy for a charlatan to acquire a large tract, surrounded by production or well known names - and equally easy for their promoters to “research” it and extrapolate estimated “production” or “reserve” numbers.

The next step often will be for the promoters to speculate on the possibility of a takeover by a major oil company and huge possible numbers for that will be touted. The company can cooperate with this by issuing meaningless statements that it is in discussion with other parties regarding the project (it could simply be for the supply of everyday services) and the promoters can twist these statements to fuel their take over theories. “Credibility” is added by other paid commentators and posters espousing and endorsing the idea.

It is important to understand that these Government issued oil and gas licences and permits can cost very little to obtain, and in some cases they can actually be a liability due to work programme commitments. The process to obtain one is relatively easy and in many cases quite straightforward. The United States has the simplest process, where Government or State departments offer leases for sale by auction. Alaska is particularly popular with promoters, due to its large perceived hydrocarbon resources. The minimum bid there, which is sufficient to acquire many tracts, is $5 an acre.

Outside North America, it is generally necessary to submit a geological report and a work programme, however, extremely large tracts can be obtained for very little cash. There are a number of geologists who specialise in obtaining licences and permits and their fee to prepare an application can be as little as $5,000 to $10,000.

As outlined previously, these leases, licences or permits can be flipped into the public company at a price which then gives the asset a multi-million pound valuation on the books of the company. This is the “fundamental” value upon which some investors are focussing.

Back to the promoters and the second main audience who are only interested in whether the price is going to go up, preferably in the shortest possible time scale, this is an even easier group to convince. All that is needed is repetition of a simple message from as many sources or accounts as possible. You will see groups regularly switch on and switch off with these types of posts like a machine. It can either be done by a number of paid posters or just by one individual with a number of accounts. The catalyst to creating buying then is simply placing a few buy trades to start the price moving up and the advertisement of that move via the paid posters. Once underway, it can be accelerated by interviews and paid commentators.

It is very easy for people to get lured into these momentum plays and, as always, FOMO (fear of missing out) is what has to be avoided. It is very important to resist these, since getting involved destroys trading discipline.

If you understand what these promoters are up to, it is easy to spot them and avoid getting involved. Yes, you could make some money on one or two of their trades, but overall you will lose, big time if you get hit with a placing, which is usually what happens. In any case, relying on these types for trading ideas is not the route to success, in fact quite the opposite.

Chapter 4 follows…