Editor’s note: This article was first published in July 2014, days after the Gowex accounting fraud came to light. The MAB was renamed BME Growth in 2020, and the situation of Zinkia, Bodaclick and FacePhi described here is as of 2014.
Some time ago we looked at the penny stock market in depth. Well, companies on the MAB, Spain’s alternative stock market for small and growing firms, bear a huge resemblance to penny stocks. That does not mean they cannot be a good investment: let’s not make the mistake of thinking that penny stocks are designed to deceive us. Some of them have made real millionaires.
The problem is that you cannot use the right method of company analysis in the wrong market. And to understand the risks of the MAB, you really need to know less about the stock market and more about business and industries.
What is the main risk with MAB companies?
First of all, the MAB does not list large companies but projects for future profitable companies. They are, in the end, small and medium-sized businesses in the middle of an investment and expansion process.
When does a company’s failure rate go up? The probability of a company failing is concentrated in two of its stages: at the start, which is usually the toughest stage, and, without any doubt, when a company tries to make the leap from small or medium-sized to large. Let’s just say that when we invest in an MAB company, we are investing in exactly that dangerous phase of the company’s life.
To give the best-known examples, Zinkia (the maker of Pocoyo) was a success that failed when it tried to build on that success, and Bodaclick collapsed in the middle of its expansion. Gowex, on the other hand, has not collapsed. Quite simply, judging by what has happened, it probably never got off the ground.
Their business models.
If I have never paid much attention to the Mercado Alternativo Bursátil, it is because the business models of most of these companies are based more on the wish for the company to succeed than on objective facts about why that particular company should succeed.
Not all of these companies, but certainly the vast majority, sell more dreams and hopes than reasons for the company to become big. Others carry more risk than penny stocks, because they base their strategy on a business model or product that is too innovative and unknown to the market, and it may or may not work.
The example of FacePhi.
Betting your savings on a long-term investment in a company like FacePhi strikes me as irresponsible, because its technology could easily be copied by any of today’s tech giants. (And I should say that I have not looked at its accounts.)
In fact, as Warren Buffett himself says, I don’t think there is a single investor capable of placing a company of this kind in a future position over the long term. FacePhi could be bought by a tech giant, and investors could come out ahead, but it could also vanish from the face of the earth at the snap of a finger. So in companies like this I don’t see an investment opportunity, but a speculative one, as with any other penny stock.
Indeed, this company’s respectable and ambitious bet seeks to provide a future solution to a current problem in a market that is still immature and that could be developed by big tech giants with far greater resources.
The MAB should not be seen as a way to grow our retirement savings, but as a way to add a small slice of risk to our investment portfolio.
Ignoring the dangers of investing in companies making the jump from small to large, with business models that are hard to understand and poorly diversified, can cause us serious financial and emotional problems in the future. Of course, it means taking big risks in the hope of earning big returns. A good strategy if you are a non-conservative investor willing to lose that money.
Have some MAB companies paid influential people in the financial media?
This part really does worry me, if it turns out to be true. On Sunday night, someone told me that Gowex had paid some analysts and business media to talk about the company’s explosive future and to recommend that shareholders buy. So I called an old acquaintance from the markets and asked him whether there was any truth in it.
All he said was: “I’ve heard something, and not only about Gowex.”
That did make me a bit uneasy because, if it were true, that is exactly what many penny stocks do: they are hyped through paid promotional articles, paid press releases and mass emails sent by agencies that charge a hefty commission on every block of shares sold, even though they know the company will most likely not survive. Something similar to what our friend Jordan Belfort (the Wolf of Wall Street) used to do. But in this case they are only rumours.
In short, whether we are investing in the IBEX, the Mercado Continuo (Spain’s main continuous market) or the MAB, we need to understand perfectly the risks of the company we are investing in. And by default, the risks of the MAB are considerably higher, so we should always do our own analysis, not only of current results but of the company’s possible future situation, always asking whether the industry it operates in is an established industry, a passing fad, a changing market or no industry at all.
Featured image: Álvaro Ibáñez, CC BY 2.0, via Flickr.
