Tech Stocks

These Guys Are Out to Cheat You


If you were to take a trip to an exotic location that had hidden dangers like man-eating crocodiles or dangerous plants, surely you’d bring a guide.

Yet many investors try their hand at speculating on small-cap biotech stocks without having an expert help them. It’s not that these investors can’t figure out a good stock from a bad one. But in small-cap biotech particularly, the waters are rife with danger – not only from the ordinary risk that comes with investing in new technologies, but from manipulation and outright fraud.

I’m sitting at the airport in San Francisco, going over my pages and pages of notes from presentations and meetings at the J.P. Morgan Healthcare Conference. But what’s sticking out most to me are not the amazing new life-saving innovations that I learned about or the brilliant scientists that I met, but the flip side of that equation: the scammers who prey on the little guy.

During the week, I met:

  • An analyst who admitted that he puts buy ratings on stocks even though the companies are garbage because his top priority is making money for himself.
  • An investment banker who talked up a company he was bringing public by merging it into a shell corporation of a defunct retailer. Biotech is tough enough when you have honest people trying to do honest work. What do you think the likelihood of success is for a company whose only way of getting funding is to merge into the shell corporation of a bankrupt retailer? My guess is this company is not the one that’s going to cure cancer.
  • Newsletter writers incredulous that I don’t buy the stocks I write about first in order to benefit from the move that the stocks sometimes make after I recommend them. (My organization has a strict policy that its editors are not allowed to write about anything they own.)
  • A CEO who blew so much smoke up my skirt that I wasn’t sure if he was trying to pitch his company or date me.

Don’t get me wrong, it wasn’t all bad. There are still some great companies like Novartis (NYSE: NVS) and Roche Holding (OTC BB: RHHBY) in the big-cap pharma space doing great things.

I also came away very optimistic about the future after seeing the work of small- and mid-cap biotechs like OvaScience (Nasdaq: OVAS), GW Pharmaceuticals (Nasdaq: GWPH) and Alnylam (Nasdaq: ALNY).

The point is that biotech can be a tough game. The companies have to prove their drugs are safe and effective and can pass the regulatory process, and after all that there is no guarantee that the drugs will be a commercial success.

If you’re going to speculate in the space and you’re not an expert yourself, be sure you’re using a qualified guide, whether it’s me or someone else. There are too many man-eating investment bankers, analysts and newsletter writers out there waiting to take advantage of your optimism.

Good investing,


*The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.


A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. He captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.


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