Beware the Whisper Stock
"I get calls from people who recommend solid companies for Magellan, and then, usually after they've lowered their voices as if to confide something personal, they add: 'There's this great stock I want to tell you about. It's too small for your fund, but you ought to look at it for your own account. It's a fascinating idea, and it could be a big winner'."
"These are the longshots, also known as whisper stocks, and the whiz-bang stories. They probably reach your neighborhood about the same time they reach mine: the company that sells papaya juice derivative as a cure for slipped-disc pain (Smith Labs); jungle remedies in general; high-tech stuff; monoclonal antibodies extracted from cows (Bioresponse); various miracle additives; and energy breakthroughs that violate the laws of physics. Often the whisper companies are on the brink of solving the latest national problem: the oil shortage, drug addiction, AIDS. The solution is either (a) very imaginative, or (b) impressively complicated."
"My favorite is KMS Industries, which, according to the 1980-82 annual reports, was engaged in 'amorphous silicon photovoltaics', in 1984 was emphasizing the 'video multiplexer' and 'optical pins', by 1985 had settled on 'material processing using chemically driven spherical implosions', and by 1986 was hard at work on the 'inertial confinement fusion program', 'laser-initiated shock compression', and 'visual immunodiagnostic assays'. The stock fell from $40 to $2.50 during this period. Only an eight-for-one reverse split kept it from becoming a penny stock."
"What all the longshots had in common besides the fact that you lost money on them was that the great story had no substance. That's the essence of a whisper stock. The stockpicker is relieved of the burden of checking earnings and so forth because usually there are no earnings. Understanding the p/e ratio is no problem because there is no p/e ratio. But there's no shortage of microscopes, Ph.D.'s high hopes, and cash from the stock sale."
"What I try to remind myself (and obviously I'm not always successful) is that if the prospects are so phenomenal, then this will be a fine investment next year and the year after that. Why not put off buying the stock until later, when the company has established a record? Wait for the earnings. You can get tenbaggers in companies that have already proven themselves. When in doubt, tune in later."