Mark Cuban Speaks

After spending almost 20 years around the financial markets and almost all of my adult life, I have to say that I have never read an article that so eloquently, accurately and so simply summarizes Wall Street. Here is the link :

http://www.blogmaverick.com/entry/2252572946170125/

I highly advise reading it. Several years ago, I was managing some money for a CEO of a NASDAQ company. This company had buy ratings from several major investment banks in the country. After meeting with my client in the Silicon Valley, he proceeded to give me a presentation about his company that was very technical. I joked with him that I really understood the story and we laughed.

After asking him if the analysts understood the story, he replied, "You probably understand it better than them." He was talking in particular about an analyst from a major investment bank.

Cuban points out:

Part of the process of taking a new company public is something called a road show. The road show is just that. A company getting ready to sell shares visits the big mutual funds, hedge funds, pension funds - anyone who can buy millions of dollars of stock in a single order. It’s a sales tour. 7 days, 63 presentations. We often discussed turning up the volume on the stock. It was the ultimate “Get Loud.” Call it Stockapalooza.

Prior to the road show, we put together an amazing presentation. We hired consultants to help us. We practiced and practiced. We argued about what we should and shouldn’t say. We had Morgan Stanley and others ask us every possible question they could think of so we wouldn’t look stupid when we sat in front of these savvy investors.

Savvy investors? I was shocked. Of the 63 companies and 400-plus participants we visited, I would be exaggerating if I said we got 10 good questions about our business and how it worked. The vast majority of people in the meetings had no clue who we were or what we did. They just knew that there were a lot of people talking about the company and they should be there.

The lack of knowledge at the meetings got to be such a joke between Todd and I that we used to purposely mess up to see if anyone noticed. Or we would have pet lines that we would make up to crack each other up. Did we ruin our chance for the IPO? Was our product so complicated that no one got it and as a result no one bought the stock? Hell no. They might not have had a clue, but that didn’t stop them from buying the stock. We batted 1.000. Every single investor we talked to placed the maximum order allowable for the stock.

How does this relate to small cap stocks? One of the things that you should take from Cuban's post is that stocks rarely trade on fundamentals. Their valuations are based on supply and demand. So the next time you're in a penny stock that has made a big move to your advantage, assume that the move was based on increased demand which doesn't really mean that business fundamentals for that company are any better.

Once again, read the article. It is Five Star Entertainment