This overview of The Cheap Investor newsletter put out by Bill Matthews will be short and sweet for reasons to be explained soon.
The message and theme of the Cheap Investor is essentially this – follow my stock picks and I’ll deliver over 98% winners for you.
Following this theme, here’s what was published on his website at the time of writing this review. “My book will teach you the same strategies that allowed me to pick 341 winning stocks out of 342 for my subscribers …”
Here’s another nugget from his advertising: “241 winning stocks out of 243 picks.” The marketing reminds me of the movies “Boiler Room” and “Wolf of Wall Street”. LINKS Both well worth watching by the way to get some insight into the shadier side of dealing in illiquid penny stock offerings.
Additional liberties are taken. Bill Matthews provides the following examples of his stock picking prowess “such as CarMax at $1.56 which went to $39.00. Then there was Vanda Pharma at $0.75, which went to $16.55”. That doesn’t mean he advised subscribers to stay in these stocks for the entire price appreciation, only that he recommended them at the lower price. It’s simply selective examples and anecdotal evidence.
This selective, but very powerful marketing message appears to be resonating with newer investors. We get many inquiries about the newsletter as the message prays on the hopes and dreams of investors hitting the mother lode. They have a very powerful marketing machine with a message that resonates very well with penny stock investors. Potential subscribers conjure up images of creating vast fortunes investing in “can’t miss” low priced stocks. Penny Stock investors also love the feeling of power that comes from buying 1,000 shares of a $1 stock compared to 10 shares of a $100 stock, even though they represent the same investment.
If you could pick over 90% winners in the stock market, why in the world would you ever sell your selections?
Now let me ask you another question. If the greatest investors of all time including Warren Buffett, Peter Lynch and Bill O’Neil struggle to pick 70-80% winners long-term, how does Bill Matthews do it? Where does his genius lie?
Quite simply, marketing.
Winners are not measured by long-term gain. They’re simply measured by any rise in price, whether it’s one penny or one dollar. If the stock goes up in price at some point in time after he recommends it, you’ve got a winner. With a large following in very thinly traded stocks, all it takes is a few investors buying to push up the price. This is commonly referred to as a pump and dump scheme. If the newsletter editor discloses his holdings prior to publication without misleading subscribers, it’s legal. You just have to make sure you sell before everyone unloads their positions.
When should you sell? You’re on your own. While Bill Matthews may disclose stock ownership, he does not provide sell recommendations. Therefore, he doesn’t have to admit to any losers.
With all this being said, if you’re really interested in penny stocks and know how to trade, The Cheap Investor may be worth a subscription for new stock ideas. However, if you’re already a good trader, you could probably do much better on your own.