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How to Get Rich Trading Penny Stocks

I first heard about Timothy Sykes at the beginning of this year. I was skeptical of his claims of making lots of money trading and even more skeptical about his ability to teach others to trade successfully. My article, “Timothy Sykes is Full of Bullship,” started a dialogue between Tim and myself. I started reading his blog and following his trades. I read every single blog post he had ever written. I became convinced that he was a talented and profitable trader and that his trading system worked. I then decided to subscribe to his TimAlerts trade service, where he sends out pre-market watchlists and alerts of his trades via email, to see if I could profitably follow his trades.

In the chart below you can see my profits from trading Tim’s system. Sometimes I followed his trades, sometimes I didn’t, and sometimes I traded stocks he did not even find. I started out trading small and increased the size of my trades over time (the red and fuchsia dots indicate where I increased my max position size).


(note: while the blue squares represent trades, many of them are me just adding to or gradually closing positions in what is essentially the same trade)

As you can see from the chart, I have done well. In just over 3 months I have made $40,000 trading his system. In one trade yesterday I made $19,000 in two days. But the amount of money I have made is not nearly as impressive as the lack of drawdowns that I have had. The one large (percentage-wise) drawdown I had (on 7/29) was my first trade after increasing my position size and it was an accidental trade that I did not even mean to make! Otherwise, my maximum drawdown was 15%, and even that was due to making a dumb mistake–getting too large of a position in an illiquid stock.

After my success trading Sykes’ system, I became the first lifetime subscriber to TimAlerts and wrote a blog post, “Why I Paid Timothy Sykes $2,000.” So, if you ever consider trading stocks (and not just buying and holding index funds as an investment, which everyone should do), then why not learn from Tim Sykes, one of the few people who makes money trading and has demonstrated an ability to teach others how to profitably trade. I recommend reading his blog, buying his book, and signing up for TimAlerts.

If you doubt my performance of Sykes’ performance, I suggest visiting Covestor, where all of Sykes’ trades and some of mine have been verified directly from our brokerage accounts.

Disclosure: I am a customer of Timothy Sykes and am the first TimAlerts for Life member. I am an affiliate of his and make a 25% commission on any sales he makes through the links on this article.

Cytocore: I was Right (of course)

It is always nice to be right. It is even better when I am right after being heckled and threatened by fans of a junky little penny stock. I first criticized Cytocore last autumn for making inadequate disclosures of a reverse share split (I should note that the company did apparently fulfill its legal duty to report the split in its 10k, but for four months there was no way for a visitor to EDGAR or to the company’s website to ascertain the true number of shares outstanding).

I then reported on some of the vitriol I received in response to the first article (which surprised me, because that first article was rather tame in its criticisms). Most recently (back in mid-February) I criticized the management of Cytocore for painting an overly rosy picture of the company.

I am happy to report that so far this year Cytocore (OTC BB: CYOE) stock is down 60% to $0.75. Despite having touted its many distribution agreements (including in Italy, Spain, Portugal, and the USA) for its cervical cell collecting device (for use in pap smears) over the last year, the company’s most recent 10Q reports a negligible $82,000 in revenue for the first half of this year.

While I wish the company luck in its endeavors, Cytocore’s business performance and disclosures leave much to be desired. Investment in the company would be foolhardy.

Disclosure: I have no position in Cytocore. I have a disclosure policy.

Let’s Hear it for Financial Armageddon

Some people thought I was crazy with my prediction back at the beginning of this year that we would see a crisis that would look like financial armageddon. But if you take a look at that article, my predictions (while not great) do capture the essence of what has happened. While I was wrong in predicting the demise of all the bond insurers and not the broker/dealers, I did make a couple good predictions:

June: Several regional banks based in California are paralyzed by bank runs. They declare bankruptcy. The FDIC estimates that the bailout of their depositors will cost $30 billion.

…

September: A large insurer reveals write downs due to mortgage-backed security losses equal to its book value. Its stock drops 90% in one day, leading the S&P 500 down 8%.

It is pretty eerie that my prediction of an insurer’s troubles corresponds closely to what has happened to AIG [[aig]]. These are scary times, but the worst is not over. Expect more bank troubles, including the failure of Wamu [[wm]] and maybe National City [[ncc]].

Bert & Ernie sing “Ante Up” by M.O.P.

Disclosure: I have no position in any company mentioned. I do have a friend who works at AIG. I have bank accounts and a mortgage at National City.

Why I Paid Timothy Sykes $2,000

I previously wrote about Timothy Sykes and his attempts to teach stock trading to the masses. That post is now my most commented-upon post on this blog and one of the most frequently viewed. Since writing that post I have changed my views on Timothy Sykes.

First, I have concluded that at least at the present time Sykes’ trading system works quite well. This does not mean that it will necessarily continue to work, and anyone using his system should not put blind faith in it. That being said, the basic premise of short-selling hyped-up stocks should continue to be successful far in the future, although the details of how best to do that will certainly change. I believe in Sykes’ system enough to trade a decent amount of money with it, and so far I have made quite a bit of money trading his system. You can see some of my successful trades on Covestor (on which I am currently ranked 13th).

I have become so convinced of the benefits of Sykes system that I bought his DVD, subscribed to a year of his TimAlerts service (whereby he sends his followers alerts every time he makes a trade, and I even recently bought the first Lifetime TimAlerts subscription (for which I paid him $2,000). I even signed up to be an affiliate to sell his products.

Normally a trading system will either produce a good probability of a profit (i.e., a high percentage of trades will be profitable) or a good ratio of average profit to average loss. Sykes’ system generates both a high percentage of profitable trades and profitable trades that make far more money than unprofitable trades lose. In this sense it is the Holy Grail of trading. The system’s major limitation is that it generates very few trading opportunities where more than a few thousand dollars can be easily deployed, although there are occasional trading opportunities where hundreds of thousands of dollars can be easily used. Also, there are relatively few trading opportunities. This limits the amount of money that can be made with this system to maybe a couple hundred thousand dollars a year at best. However, this limitation of the system also minimizes the chances that hedge funds will exploit the same inefficiencies that the trading system exploits and thus render the system ineffective.

The other problem with a trading system that produces few trading signals is that it is hard to keep from over-trading. The hardest thing to do is sit and wait, as evidenced by Sykes’ own history of impulsive, forced trades. While he was still able to reap huge profits, others may be less disciplined. I have already seen evidence of followers of Sykes’ TimAlerts service trading way too much (and Sykes himself has criticized his followers for this numerous times). I think it likely that some of them will trade away all their profits by forcing trades when the risk/reward ratio is poor.

My Original Criticisms Still Stand

In my original article on Timothy Sykes, I laid out three criticisms of his plan to teach trading to the masses. These criticisms still stand, although these criticisms point out the limits of an otherwise powerful system, rather than revealing the ineffectiveness of the system as I argued in my original article. Anyone considering following Sykes should consider the following:

1. While Sykes’ system will degrade gracefully (meaning that if it stops working it will gradually generate smaller profits, not change quickly from generating profits to generating large losses), I have already noticed cases where he and his followers’ actions have changed the chart patterns his analysis relies upon. He has enough TimAlerts subscribers that they can easily move the market in certain illiquid stocks. This makes using his system more dangerous than if he did not have so many followers.

2. Trading takes time. For many of Tim’s followers, with tiny $5,000 accounts, the amount of time they spend trading the system (especially if they do not follow his advice and ignore non-ideal trades) can be disproportionate to their gains. While I am a full-time trader (I utilize a few strategies, not just Sykes’ strategy), many of his followers have other, full-time jobs. Those people would be wise to concentrate only on the most ideal trades, lest they ruin their careers in a vain attempt to get rich trading.

3. Most people do not have the emotional restraint to be successful traders, no matter how simple and effective the trading system they use. This is my most important criticism. As even Timothy Sykes points out, over 95% of stock traders lose money. Those who cannot handle the emotional demands of trading will likely lose money even if they try to trade a system as simple and profitable as Timothy Sykes’ trading system.

As an illustration of my third point, I bring you the following example.

Nothing is Foolproof: The Case of Ross

As a subscriber to Sykes’ TimAlerts I get to see the comments made by other subscribers; they often share their trades and thus I can get a feel for how Tim’s followers are doing. The problem with any kind of stock trading, no matter how good the system, is that it requires a human to trade it. Human emotions seem almost designed to prevent successful stock trading.

I present here the case of “Ross”, a subscriber to Sykes’ TimAlerts service. Ross should serve as an example that an an emotional, undisciplined person can lose money trading a good trading system. I should point out that while he subscribes to Sykes’ alert service, Ross has not bought Sykes’ DVD. He also appears to be the exception among TimAlerts subscribers — most who post their trades appear to make money.

Sykes bought 4C Controls (OTC: FOUR) at $2.85 on August 18th. At 12:20pm Ross posted [subscribers-only link] “I am in with 300 @ 3.00”.  Sykes sold the stock around 12:55pm after it failed to go up as he had predicted. Ross posted that he was holding FOUR, saying “It looks like it is trying to work it’s way back up.” Sykes responded, saying “ross, in time, u’ll learn to cut lsoses quickly and not risk disasters.”

At 2:02pm, Ross wrote, “FOUR looks like it is going the right direction now.” Sykes castigated him, writing, “haha ross, looks like u got lucky, bad lesson.” Ross continued to hold FOUR overnight; the next morning he wrote, “Well I learned the hard way and lost more then half my money on FOUR this morning. I got in @ 3. and just sold for 1.35 That hurt. All my other trades I have done have tanked on me as well. Pretty much lost most of my money. Looks like I am out of the game for a while.”

While trading FOUR lost Sykes money too, Ross also managed to mess up easily profitable trades by letting his emotions get in the way. He said, “I messed up on USS and ZYXI and EVSO as well. I also made some other trades a friend suggested as well and they went the wrong way.” This was despite Tim having profitably traded those stocks. I myself had a profit margin of over 20% on USS.

Conclusion

If you want to try trading stocks, try following Tim Sykes’ system (I suggest just reading his website and analyzing his trades for a few months, although you can go ahead and directly buy his DVD or TimAlerts trade alerts service if you are rash); it is the best stock-trading system I have seen, as evidenced by Sykes’ top rating on Covestor and his multi-year performance record. However, most stock traders will lose money because they let their emotions rule them; using a profitable system will not prevent them from losing money. Recognize your limits and do not try to trade if you do not have the requisite emotional control. Don’t be like Ross.

Request for help – Looking for a direct market access broker

As my regular readers are aware, I have sold short a number of penny stocks over the last year. However, that strategy has not worked recently due to my broker, Interactive Brokers, forcing me to close out short positions without notice due to an inability to continue to borrow shares. I am therefore searching for a new and better broker. If you happen to know of any brokers that are good at getting long-term borrows on hard-to-borrow OTC BB and Nasdaq stocks (it would also be great to be able to get pre-borrows) and that would be willing to deal with a sophisticated individual investor, please contact me or leave a comment below. If you know what kind of account / trading minimums I would need for them to give me the time of day, please let me know.

I am currently looking into Genesis Securities as well as RBC Professional Trader. If you have experience with either of these, please let me know by leaving a comment here or sending me an email.

Thank you for your help.

Noble Roman’s Sued by Franchisees

I am quoted in another excellent article by Cory Schouten of the Indianapolis Business Journal. Ten former and current franchisees have sued Noble Roman’s for misleading them when it sold them their franchises.

Here is what I was quoted as saying:

But plenty of the blame for franchise problems rests with the Mobleys, according to Michael Goode, a St. Louis stock trader and financial blogger who writes GoodeValue.com.

The company owns only a few stores, giving it little opportunity to prove the model works and to test new products or strategies, Goode said. The Mobleys also tried a nationwide expansion despite lacking national marketing and having limited brand recognition.

But the biggest red flag for Goode was the barrage of area developer agreements that boosted revenue and profit.

“They engaged in business in such a way to get lots of near-term earnings at the expense of future earnings,” said Goode, who previously bet against Noble Roman’s by selling the stock short but no longer has a position.

Further Information

I argued that Noble Roman’s expansion strategy was doomed to failure back on December 2, 2007 when the stock was priced at $2.48. I later criticized management for blaming franchisees for their failures. More recently, I mocked the company’s effort to hire an investment bank to sell itself, calling the company overvalued at $1.50 per share. The stock currently trades at $1.00. Most recently, I reported on the company’s 54% decrease in earnings.

Disclosure: No position in NROM, long or short. I have a disclosure policy.

Perf Go Green Holdings: Another Pumped Up Penny Stocks Falls to Earth

Perf Go Green Holdings (OTC BB: PGOG) is a standard pumped-up penny stock, although it has former NY governor Pataki as a director to lend it “credibility” (although anyone who know’s Pataki’s record knows that he has no credibility at all). The New York Post had a good article about the company. Carol Remond had a great article on Perf Go last week (only available on DJ Newswires, a pay service), in which she brought up some interesting history about the company’s CEO:

“Then, there is the issue of company Chairman and Chief Executive Anthony Tracy’s involvement with an extortion attempt a few years back. According to a court docket available to online subscribers, Tracy pleaded guilty to one count of extortion in state court in Pinellas County, Fla., in August 2002. Joseph Cartolano, a lawyer who represented Tracy, said he is “pretty sure” that his client pleaded no contest instead of guilty, neither admitting nor denying guilt. The judge in the case sentenced Tracy to three years probation and withheld adjudication of guilt – which means that as long as he didn’t violate the conditions of his probation, he wasn’t convicted of a crime.”
…
“According to information available online, Tracy and George Cappelli in November 2001 threatened a Palm Harbor businessman named James McGuire to get back $30,000 he owed to another individual. Michael Holbrook, a detective who investigated the case, said Tracy took McGuire’s watch and said he would keep it until the debt was paid. The detective said that about the same time as Cappelli was arrested, an attorney from Miami called the Pinellas Sheriff Department looking to return the watch without naming his client. Tracy was later identify through information contained in one of Cappelli’s notebooks. Tracy’s lawyer Cartolano said he (Cartolano) called “the owner of the watch to return it.” Cartolano, who explained the affair as “an argument between two guys”, said Tracy was given the watch as a collateral and then returned it.”

The fall of pumped penny stock Perf Go Green is yet another testament to why people should never speculate in penny stocks.

Disclosure: No position in any stock mentioned. I inadvertantly published this article two days previously, violating my disclosure policy (as I had just closed a short position in the stock a day earlier). I regret the error.