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written by reader American Graphite Technologies (AGIN)

By Anonymous Questions, May 23, 2016

What do you know about American Graphite Technologies (AGIN)? last year I received a beautiful booklet from The Wall Street Revelator touting the wonders of their product called ”Graphene”. They covered many uses that Graphene could impact several technologies, but the one that got me was ”tomorrow’s iPhone today. This was the first stock I bought after I opened my trading account. I.m not finding anything except what I received in their brochure. Your thoughts?

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Travis Johnson, Stock Gumshoe

Graphene stock promotions have really all been junk, from what we can tell. Partly that’s wisdom brought by hindsight, but I also had plenty of concerns when graphite stocks were getting a lot of attention — the value of graphene comes from the processing skill and the technology, which isn’t really commercial yet, and from eventual mass adoption of the material, which is substantially further out into the future than investment promoters like to imply. The value does not automatically convey to the raw material graphite, from which graphene can be made. The value of graphite is determined almost entirely by steel and industrial demand, including use in batteries and lubricants. My sense is that graphite should be relatively steady in value, albeit with cyclicality because of the ups and downs of the steel industry, but it’s not particularly rare or unique or valuable as a raw material beyond that, and I think there’s very little likelihood of demand for graphene causing a real bull market run for graphite prices (at least not for the foreseeable future, like the next few years)

But in this particular case AGIN was almost certainly a “pump and dump” stock — they used lusty promotions, like that glossy mailer you got, to drive up the price so that the sponsors of the promotion could sell out at a higher price. Probably the mailer said somewhere, in small print, who paid for it — it could have been a third party that is associated with the offshore traders who buy up microcap stocks, promote the shares, and then sell; or it could have just been the company itself trying to drive the share price up so they can either raise more money or, if they’re crooks at heart, so the insiders can sell.

The standard maxim is, “don’t buy a stock if someone is trying really hard to sell it to you.” In many cases, and almost always when it’s a tiny little stock like this with no real business or ongoing operations but the pitch is based on just an underexplored mining asset or a pre-clinical drug or a pre-commercial technology where the story draws you in and you can imagine huge growth, the folks selling the stock are motivated only to boost the stock temporarily, long enough for them to sell shares at a higher price. Often even the company who produces and mails the fancy brochures will be compensated by stock that they’re hoping to sell, though that would likely be in the fine-print disclosures as well.

Penny stocks, particularly those with market capitalizations that are really absurdly low, below $100 million, are best avoided for those who don’t like to dig into the actual financials, understand the valuation in very specific terms, and try to separate the real from the junk — there’s too much junk out there, and too many people in the dirty underbelly of the investment world who are good at manufacturing stories to sell to naive or misled investors. And really, when you’re talking about stocks below $20 million (this one has a market cap of about $3 million), it’s worth remembering that there’s really no logical reason for such a company to be publicly traded — other than the fact that being publicly traded makes it easier to take advantage of small individual investors.

They aren’t even necessarily breaking the law in many of these “pump and dump” operations — there’s an awful lot of ass-hattery you can get away with as long as you’re disclosing it in the fine print.

And one final point: If you realize you’ve made a big mistake with an investment, try to resist the knee-jerk urge to “hold on until it recovers” so you can sell — there’s always a good chance that it will never recover, particularly if it was overpromoted junk to begin with, and a stock that has fallen by 90% can still lose all of it’s value and fall by 99% from today’s price. I have one stock in my portfolio like that, and I keep it because I want to be reminded of the screw-up — it fell by 50% and I let it ride, then it fell by 50% again and I thought it was done going down, then it fell by 90% and I figured that was as far as it could fall… and after all that, it did at least one reverse split and, over time, fell by more than 99%. Being patient works with blue chips or stocks with real, sustainable businesses that are likely to recover over time even if there’s a temporary panic… but junk stocks that deserve to go to zero will get there eventually, no matter how much you paid, and there’s usually no fundamental reason for them to get back to some “normal” higher price. The only recourse is usually if you get lucky enough to have someone nefarious promote the stock again and drive it back up to ridiculous valuations, but unless you’re an offshore scammer you don’t know if or when that will ever happen, and you’ll probably feel kind of dirty by profiting from it.

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