Sunday Blog, 29 January 2023
Core Information - How the market really works
If you do not know exactly what you are doing, it is not easy making money in the speculative small cap markets and often preconceptions can get in the way. There are many books on investing and trading, but hardly any that address the actual peculiarities of these markets. The few that do exist deal only with the North American markets, which operate in quite different ways to London. General stock market investment books are quite useless in this respect, since investment techniques suitable for main markets and large companies are not appropriate for AIM and small cap companies. Most of those that try to apply these techniques lose, often a lot. It is a completely different game.
Essentially, beyond technical descriptions of the market, basic explanations of what a public company is and outlines of how the market operates from the public perspective, there is not actually much useful information out there about trading AIM and small cap companies. Hence, I decided to write this. I shall be covering everything you will not read elsewhere, particularly subjects which others either do not understand or even know about, or even if they do, are unwilling to talk about openly, including shorting and the various forms of market abuse. I shall set out exactly how all this works in detail. Exactly how the insiders make their profits. And how you can profit too. I shall explain all the things that no one else will, all the secrets the insiders do not want you to know. A large amount of money can be made if you know how it all actually works and what goes on behind the scenes may be completely different to what you think. This material will be useful to all trading the AIM and small cap markets. I believe most will find it eye opening.
I have been involved in the markets for a long time. I bought my first shares in the 1970s and I have worked in the financial sector since the early 1980s. My particular knowledge is of the stock markets and I have been actively involved in these, both in the UK and the US, from both sides of the fence, for over 40 years. My focus is on the oil and gas industry, where I have significant experience, but I also understand fully how the game is played in all the other sectors, whether it is mining, pharmaceuticals, technology, or any other area. The modus operandi with all of them is just the same. I understand exactly what everyone is doing and precisely what their agendas are
The only way to succeed in these small cap stock markets is to understand and accept reality, and that is what I am going to set out and explain. I shall assume that readers know the basics such as what a share is, how to open a trading account, where to find share prices and company information, etc.
What is important to understand from the outset is that very few of these companies succeed. Many rotate through a series of different managements and projects, with their share prices declining year after year. Even the ones that do appear to “succeed” often do not do so from the perspective of longer-term shareholders, the value of whose investments constantly erode away with continual dilutive financings. While the very occasional one will actually deliver for shareholders, broadly these AIM and small cap companies should not be viewed as investments. Anyone with doubts about that just needs to review a few longer term price charts to see the endless declines.
What these type of shares are good for though is trading, since they can move very fast, often by multiples, in a short space of time. To succeed, it is necessary to understand why and when they do this, and how to avoid the numerous pitfalls and traps that can ruin people who get involved.
The first things to put to one side are fundamental and technical analysis. They are simply not applicable to small, speculative companies in continuous fundraising cycles. Of course, the company has to have an exciting project, that is essential and, yes, they all will have resource reports and/or financial projections, but that all is best taken with a pinch of salt. What is assumed in these is rarely delivered. Key if there is going to be short-term share price performance is a compelling, highly promotable story, with big headline numbers.
Technical analysis is equally inapplicable when large numbers of new shares are being issued into the market at new price points. Previous support and resistance levels lose any significance with the large scale dilution that takes place in these companies.
Those who see themselves as investors wanting to invest in great projects and profit thereby may question all this, but it does not matter how great the project is if the company is going to finance it with multiple placings at ever decreasing prices.
As perhaps is becoming clear, the key points in fact are financing and promotion and these are what this text is about.
Small cap speculative companies exist to enrich their insiders, not their public investors, and everything they do is for their own benefit, not yours. The vast majority lose with these companies, but for the scheme to work, some have to profit and you want to be one of those.
So let us go through the various stages when a “deal” is put together. Whether they are using a shell or floating a new public company, the operation is basically the same, although a shell is often easier since many of the necessary elements (compliant non-executive directors, NOMAD, brokers, solicitors and auditors) already are in place, although serial players will have a tried and tested (from their point of view) “team” of their own to use.
First, they need a project and I shall focus on oil and gas, although the principles are the same for all companies. It does not necessarily need to be a good project, the main requirement is large potential numbers. Failure generally is on the cards anyway. Best from a promotional point of view are projects that are drill ready.
There are two main options (other deal types will be discussed in relation to company structures and share issues later): acquire or farm-in to a permit or license, where all the preliminary work such as seismic is done and the next stage is drilling, or acquire an old oil field with possible undeveloped locations and deeper exploration potential. The latter is quite popular since such fields can often be acquired for very little; indeed, if there are decommissioning liabilities, they might even get paid to take them over. Often they are acquired by an offshore company and the public company does its deal with that, with the organisers effectively flipping the asset into the public company for a several million pounds upfront profit. It can also be done for no or little cash with the public company agreeing to do certain work and the organisers’ offshore company retaining a carried interest. Many deals are more sophisticated and the transaction is done in stages, but the principles are the same. Of course, some companies are genuine with real projects. Sadly, they do not necessarily always perform that well. There are a few stars every decade, but very few of the companies we will encounter are actually like these ones and commercial failure is the most likely option.
Remember, most projects are not economic and will never even cover the public company costs, let alone provide any return to shareholders. Indeed, many projects only exist because they are necessary for the CEO and/or organiser to hustle the money. First hard question: is the project even viable? Second easier question: who knows more, the experienced operator selling the asset, or the young corporate finance guy buying it with the money of the ill-informed? Reality is the good projects get acquired by the large companies; small companies rarely get their hands on them.
With a vehicle and a project, the organiser, whether the CEO or someone behind the scenes (as often is the case), will address financing and promotion. These are the two most important matters from our point of view and, with the advent of social media, they have started to merge together. As I said before, much of this is done in stages, but it is the main financing for which we need to watch.
The key is always to be heading for an event, fully financed. You do not want to be in at an earlier stage, with the main financing still to be done, or be in after the event, when the development finance will need to be done, but without the original excitement.
I am going to be addressing all of this and more in much greater detail, with clear explanations of how such knowledge can be applied for advantage. There are some truly dire companies that never offer any long-term profit opportunity, but many do for a certain period of time and that is what the “game” is all about. Yes, there is the very odd one that could make a good investment, but the vast majority do not, which is why most AIM and small cap investors’ portfolios show losses, often extremely large ones. It is about trading them over relatively short periods of time. That is where the money is made in this market.
Subjects I shall be covering include shorting and the various ways this is done, naked shorting and how it is guaranteed profit for some, forward selling, market abuse in its many forms, promotion including exactly how it works whether via traditional media, social media, IR/PR companies, brokers, bulletin boards, commentators, paid for opinion, interviews, web sites, messaging and emails, and financing, including placings, subscriptions, convertible financing and investor sharing agreements. I am not expecting you to do any of the dodgy stuff described, but it is important to know about it. I shall also be addressing ways of trading, including conventional and extended settlement and the use of CFDs and spread betting, plus their advantages and disadvantages. In addition, I shall be explaining how to see through these companies to understand what they really are and who is actually in charge (it is not always the CEO or the Board). I shall also be explaining who the “institutions” involved in the financings actually are (most are nothing like what the name implies), how many do not even have to put up any cash to profit, and much more. I believe there will be something for everyone to learn here.
I shall not be covering theory, rather how it all actually works in the real world, keeping it practical and realistic, so that everyone can use the information for their own advantage regardless of the level of their trading or investment.
What it is all about of course is identifying the right companies at the right time. Buying at the best point and selling or de-risking at the best time(s). That is the most important aspect of all and something I shall be covering in detail, since the whole point of this work is to be able to make money short-term in the AIM and small cap markets.