Manna from Heaven and Easy Money

As originally appeared in The Jerusalem Post on August 23, 2024.

In this week’s Torah portion it says, “The One Who feeds you manna in the desert…in order to test you. (Devarim 8:16) The commentators all ask the obvious question as to what the test is.

According to the Sforno the test is to see if the Jews would still follow the Torah when they do not have to worry about their livelihood. Rabbi Yissocher Frand expands on this. “Yes, there is a great test in “bread raining down from heaven.” Affluence without effort is a dangerous thing. It comes with a great amount of leisure time and freedom of action.

What do we do with that leisure time and that freedom of action? Do we use our leisure time and freedom of action to taste the forbidden? This is the great test of the manna. We are all aware of the test of poverty. We are all aware of the trials and tribulations of being poor. However, says Sforno, affluence also comes with great temptations. It puts a tremendous responsibility on a person. This is the test of the manna, and it is the test for many Jews in these affluent times.”

Have you ever received an email with a subject that looks like this?

Unlock the Doors to STAGGERING PROFITS!
The Next Hot AI Stock!
A Real Chance at 1000% Gains in Stocks in the Coming Years

I get tons of emails a week with headlines like these and get forwarded a bunch more from clients asking me if this is legit. Everyone is promising you the newest way to make a quick buck. One of the most popular methods of investing underlying these outlandish claims is by investing in Penny stocks.

What Are They?

Penny stocks are usually defined as very small companies, with stock prices under $5 a share. Often you will find these shares trading under $1, or literally trading for pennies. The headlines are enticing. Everyone wants to find the next Nvidia or Apple, and the potential of quick riches is often overpowering, and they fall prey to the enticing headlines.

If you can buy a stock trading at 20 cents, if it only moves up another 10 cents you have a 50% return. In addition, if you have $5,000 to invest, you can buy 25,000 shares. That’s sure more interesting than buying 80 shares of JP Morgan, or some other old and stodgy company. All this sounds great and so easy. The problem is that the stock can as easily go down 10 cents, and you can lose half of your money. According to the Securities and Exchange Commission (SEC), the term “penny stock” generally refers to low-priced (below $5), speculative securities of very small companies. To quote the SEC: “Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.” (It’s interesting that the use of Italic font is in the original.)

I would say that there are three major issues with investing in penny stocks:

Little Information for the Investor

When making an investment decision you need to make an informed decision. The problem with Penny stocks is that they have no reporting requirements to the regulator (SEC). Which means whatever little bit of information is available to the public (and it usually isn’t much) is unreliable. If you try and search for information on these companies, there often is nothing to be found. Not an advisable way to invest.

Liquidity

There are two problems with stocks that don’t have much trading activity, or lacking liquidity; there is a very real possibility that when you decide to sell the stock you can’t because no one wants to buy it from you. In such a case you will have to lower the price that you are willing to sell it for in order for it to be attractive for someone to buy it.

Pump and Dump

Due to continued coughing attacks, I was up all night most of the week. One night I watched the movie ‘Boiler Room’ which is about a brokerage firm that runs a “pump and dump”, using its brokers to create artificial demand in the stock of expired or fake companies by cold calling investors and selling them shares at prices set by the brokerage firm, which include a large commission to the brokers (up to three dollars a share for a penny stock). When the firm is done pumping the stock, the investors then have no one to sell their shares in the market, and the price of the stock plummets. In the movie Jim Young (Ben Affleck) is explaining to a young recruit the philosophy of the cold call. “And there is no such thing as a no sale call. A sale is made on every call you make. Either you sell the client some stock or he sells you a reason he can’t. Either way a sale is made, the only question is who is gonna close? You or him? Now be relentless, that’s it, I’m done.”

Buyer Beware

Do NOT take the plunge into Penny stocks before doing a lot of research and make sure that you are not falling victim to a scam. If you feel that you are lacking enough information, save yourself a lot of heartache and don’t invest.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.