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Monday, April 5, 1999

"Chop Stock" Suey

by Douglas Carpenter

A number of years ago I was working as an assistant in a brokerage office. A group of about 10 stock brokers were having a problem: They had four low-priced stocks that the firm wanted them to sell. They couldn't decide which one to recommend to their clients. What made the recommendation difficult was not the debate over which might be the best performer, but rather the fact that all four paid the same commission amount.

These four potential "winners" were what is commonly known as "chop stocks." This name is appropriate because of the very high commission amount that is earned by the broker when he/she sells it to a client. Typically 20-50% or more of the price of the stock is paid to the firm as commission (the chop). Put your head into a chop stock and you are likely to lose it. Each company had no earnings, little revenue, many shares, and tons of stock had been given to the brokerage firm for pennies a share during the underwriting.

So how did they decide which one was appropriate for the portfolios of their victims? Simple! They went out and purchased four colorful fighting fish and named each one after each of the stocks being "analyzed." They put the fish in a bowl together and let them fight it out to the death. After 24 hours only one fish remained, along with the entrails of the other three belly-up fish. They had their winner! They immediately solicited their clients to put their hard earned money into the stock whose namesake was the sole living member of the high stakes bout.

As a final motivation they agreed amongst themselves that the one among them who sold the least number of shares would swallow the final fish.

This is a true story. They sold tens of thousands of shares of this stock. The fools (note lower-case "f") who bought this company lost most, if not all, of their "investment." Think about this the next time someone calls you about a hot stock.

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