Post of the Day
March 24, 1999
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Subject: Fishing for victims
This goes back a number of years to when I was working as an assistant in a brokerage office. A group of about 10 stock brokers were having a problem. They had 4 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 4 paid the same commission amount.
A little background on these 4 potential winners is necessary. They were what is commonly know 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 4 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 3 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 not very foolish people who bought it lost most if not all of their (for want of a better word) "investment." Think about this the next time someone calls you about a hot stock.