Navigating the Wild West of Canadian Penny Stocks

Cautionary Statistics for Speculators in 1987 and Today's Relevance

1987's 'Fleecing the Lamb', provides a stark look at the world of Canadian penny stocks:

• 84% of investors watched their investments shrink, with 40% facing total loss.

• Only 51.3% of $1.24 billion raised (1965-1978) reached intended companies; the rest went elsewhere.

• Property vendors (7.9%), promoters (13.8%), and brokerage firms (27%!) claimed shares, with just 15% funding actual projects.

• Behind the scenes, promoters fueled up to 70% of trading activity.

• Notably, 20-30% of trading in 1974 involved manipulation, with individuals having criminal records actively participating.

These stats stem from the Vancouver Stock Exchange (VSE), founded in 1907, which became the TSX-Venture Exchange (TSXV) in 2001.

High Capital Costs

In the capital markets, there’s a widely acknowledged principle: The riskier the investment, the larger the commission for raising the money. 

But how brokers claimed 27% of VSE funds is baffling. In an era of fixed 6% trading fees, limited tech and information, absence of insider trading regulations, and zero capital gains taxes, it truly was a Wild West.

The brokerage scene has transformed since "Fleecing the Lamb," with industry consolidation and a shift towards wealth management. Few dedicated Canadian speculative brokers endure, while many became promoters.

Yet, capital remains expensive. Agents may pocket a 7% commission for bringing investors, plus compensation to promoters in cash or cheap shares. Building an aftermarket comes with an even heftier price.

In the past, brokers made markets for the firms they underwrote. Today, the task falls on companies and their promoters to lure new investors.

People often view stock promotion as "pump and dump" schemes, with insiders offloading shares. Savvy investors see promotion's role in helping growing companies. These non-profitable ventures aim to "consume capital to create wealth," says mining investor David Lotan. Limited analyst coverage hampers attracting investors, forcing more share sales at lower prices, diluting ownership and hurting existing investors.

A recent example saw an institutional investor leading a $20 million Canadian venture stock financing, demanding 20% of funds for investor marketing.

Defying the Odds

From an investor's perspective, embarking on a venture with only 50 to 70 cents on the dollar is a significant hurdle. However, it's worth noting that many successful businesses are essentially innovative solutions buried beneath layers of unnecessary red tape. Consider Google's search engine, and the multitude of superfluous elements that accompany it.

Doug Casey likened penny stocks to bright, fleeting matches. In venture capital, only a few companies achieve massive success, outweighing numerous losers.

Occasionally, Canada's venture stock exchanges foster exceptional success stories, even beyond the natural resources sector. When global trends such as cannabis legalisation or crypto mining surge, Canadian-listed firms frequently lead the charge, offering investors potentially life-changing gains. However, these opportunities are speculations, not traditional investments.

As Howard Lindzon advised, "Find trends, ride them, get off early." Or follow Seymour Schulich's wisdom, "Be the promoter, not the promotee."

Howe Street Insights

“The real story of the Vancouver Stock Exchange is the promoter. If you tell their story, you’ve said it all.” BC Superintendent of Brokers Rupert Bullock in 1985 (Page 123). 

‘Fleecing the Lamb,’ by David Cruise and Allison Griffiths, unveils the VSE's history on Vancouver's Howe Street, known as the hub of speculative penny mining stocks. The book shares inspiring successes and cautionary tales from a century of Howe Street dealings. It’s a must-read for those venturing into speculative markets today, much like Jacquie McNish's 'The Big Score,' after which this newsletter is named.

When it's about getting the lamb's wool, the aim is to do it without hurting the animal. The past stats show VSE promoters struggled with this. This newsletter hones in on those going a different way.

Let’s grow The Big Score community and win together. Share, comment, and press the heart button. Send your story and speculation ideas to thebigscore@substack.com.