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Securities Attorney John Lux


Securities attorney John Lux talks with the Opportunist’s Managing Editor Leslie Stone about his career, the fundamentals of finding undervalued stocks and why he believes small businesses just might revive the U.S. economy.

Some people jump out of airplanes for an adrenaline rush. Others climb Mt. Everest. For John Lux, trading stocks has been the thrill of a lifetime. “I just love trading stocks,” he says. “If you want action and excitement, stock trading is phenomenal. It’s such a complex game, which, to me, is endlessly fascinating. You cannot beat it for an adrenaline rush unless, of course, someone is actually shooting at you.” [Laughs]

The securities industry is also something this former market maker, futures trader, securities attorney, underwriter, investment banker, securities analyst, venture company president, venture capitalist—and quant—takes very seriously. “It’s very rewarding to help investors because stocks—especially penny stocks—can be very dangerous if you don’t know what you’re doing. I wish everybody knew what I know. Lots of people love to trade penny stocks but that’s where they get hurt the most. If they are going to do it, they ought to have more information under their belt. There is no substitute for solid information built on years of research.” He has written five books on the subject and has a sixth in the works.

Opportunist: Did you always know you were destined for a career in securities?

Lux: No. As a boy, I developed an interest in science. My father was a chemical engineer and also a business executive. When I graduated from high school I took some aptitude tests and was told I should become an attorney but I said, ‘No way will I ever be a lawyer.’ The aptitude tester disagreed and we argued for about eight hours before it was decided that I would study the physical sciences.

Opportunist: How did that turn out?

Lux: I soon discovered that I had no aptitude for it, so I dropped out of school. I couldn’t figure out what to do next and my father told me, ‘If you’re going to sponge off me, you’re going to plot my commodity charts.’ In those days you had stacks of newspaper clippings, and it was very boring, but before long I started to guess successfully which way the prices were going to go. I knew I was a natural. For the first time I felt like a fish that somebody had finally thrown into the water. We opened a commodities account in my name, but I was under age so I had to phone in the orders to my father’s secretary. [Laughs]

I eventually got a $65 a week job as a clerk at E.F. Hutton, and they were kind enough to recognize I had some aptitude for this. My second year there I was the No. 2 guy on the over-the-counter trading desk. I was sorry to see Fridays come because I knew the market would be closed for two whole days and I would be without my ‘drug’ until the market reopened on Monday morning. [Laughs] It could be a Saturday night, but I’d have stacks of reports to go through—and I loved it! I laughed to myself because it dawned on me that the guy I was working for was paying me to do something that I gladly would have paid him to do.

Opportunist:  So what made you change your mind about law?

Lux: When lawyers started chewing up the deals I was trying to do at the tender age of 21. I went to business school along the way and discovered that I had a real aptitude for statistics so I got my degree in quantitative analysis. I clerked for a judge for a year and practiced law for a year but decided to return to Wall Street—where all the fun and excitement was. I also discovered I had an aptitude for reading annual reports and market making and anything else I could do.

Opportunist: What was your niche?

Lux: I branched out into different types of deals. My legal expertise allowed me to help people with deals quite a bit, and I also developed my own style of trading. I eventually wrote my first book, How to Find a Home Run Stock, which is about stocks that doubled or tripled in six months to a year. After a while I got into advising short sellers and had a lot of fun with that. And, when I saw that short sellers were getting too rough, I wrote How the Shorts Raid Your Stock. It exposed how short sellers took techniques and re-engineered them to beat up companies more than the companies used them to survive. At one point, I segued into international finance projects.

Opportunist: What motivated you to write books?

Lux: Generally feeling sorry for investors. One time a stockbroker called to ask my opinion about a stock that one of his clients owned. When I told him how excited I was about it, he said he was going to sell and put his client into something else—he was obviously going to get a good commission. After selling his client’s shares, that particular stock went from $15 to $75 in six weeks.

Another time I was talking with an investor who had lost his daughter’s entire college fund to a notorious penny stock promoter. I would write down basic principles that were so easy to use and that were going to help these poor investors.

Opportunist: What is the topic of your last book?

Lux: It’s about how to pick hot reverse merger penny stocks.

Opportunist: How does that work?

Lux:  A solid company is merged into a shell company that was trading at a low price and the price skyrockets. Investors can make a lot of money in those deals but they can also easily lose their shirt. It truly can be the roulette wheel of the stock market because, when they peak after the initial rush, 90 out of 100 go down to nothing. Anybody who bought at the top gets hurt. It can be a very nasty thing.

Opportunist: What are some of your favorite career moments?

Lux: When I ran three startups at once. One was an alternate energy company that I took from nothing to $100 million valuation in one year. I also had a Linux company—Linux software was hot in those days—for which I started out doing legal work. The founder was so impressed he made me president of the company. I also did an optical company that was put into a public shell and went from trading at $1.50 to $15 in eight months. We were actually horrified at how quickly that one took off. We felt it was too much too soon, but people liked what we were doing.

Perhaps most fortunate for me was running market making for a company in New York. Heading the syndicate department was a gentleman who was famous in the underwriting community. He had 40 firms like Raymond James in Florida in his syndicate, 40 of these regional NYSE trading houses. We would go to dog-and-pony shows about twice a week, where 30 to 100 brokers asked questions of management. That gave me a real sense of how people looked at stocks and, as you might imagine, became very useful in helping me understand investor behavior. I owed a favor to an investor relations company and the owner said, ‘I’m calling my favor…I want you to go and interview this firm and do a report on them.’ Lo and behold, the people who ran this firm were utterly obnoxious. I said, ‘I will do a favorable research report on this company and they will think the report is great but the stock will not move.’ Most of the information that I included, although positive, was basically information that investors would not care about. The other information, which was not favorable, included the finer points that investors would care about. When the company asked why nobody was buying their stock and why it had not moved, I realized that I could drill it down to that fine of a point—to precisely what investors will look for and what they will avoid.

Opportunist: Can you tell us about your overseas adventures?

Lux: My partner, a former Navy SEAL, and I had some hair-raising adventures overseas where we actually wondered if we were going to get out alive. Our favorite thing was to go to places where they had just stopped killing people. Yeah, it’s been a very exciting career. [Laughs]

Opportunist: What compelled you to travel to such volatile places?

Lux: I have a confession to make: I was a risk junky. Stock trading wasn’t enough. We went to Liberia, Nigeria and Russia. When we were landing in Liberia, I noticed large black spider web-like markings on the buildings and my friend said they were bullet holes from AK-47s. The violent rebels were 20 miles outside of town and the place was being run by a peacekeeping general. When we had to pass through two military checkpoints, which were both empty, we were worried the rebels were going to kill us and steal the car or grab the money. Thankfully, they didn’t.

We did a lot in Russia that was exciting. Communism had just fallen, and we met with all these ministers about a $1.5 billion financing deal for one of the largest oil companies.   Before we could implement it, the company was stolen by a guy named Mikhail Khodorkovsky, who is now in jail.

I introduced some of the Russians to some of the Wall Street people I knew and they became electrified and offered to get me a mandate from Boris Yeltsin, but it was very difficult to get financed and I thought it was too risky and turned it down.

Opportunist: Are there any regrets about that?

Lux: No. I believe that it would have been a very risky thing to do. If we had brought in a bunch of money there was a chance somebody would have stolen it—and if we didn’t bring in the money we would have run through the budget and the Russians would have become angry. I had a tough time seeing a good end to that.

Opportunist: Are any exciting deals currently in the works?

Lux: I am working on one venture that excites me very much, with a treasure hunting company. It’s a private company, though, so there is no opportunity for public investors. I am also helping to develop several other companies, and I just love doing that. Those, to me, are very exciting opportunities.

Opportunist: What are your tips for novice traders?

Lux: There is a basic formula to finding stocks that are undervalued and understanding how the market works and how stocks move so you can get in and get out at the right time. You cannot do it without looking at the fundamentals. You have to understand how the market moves, you have to understand investor psychology and you still have to understand business. My father built several companies. He ran a company called Haveg. The stock doubled every year for seven years and it was bought out by Hercules.  Another of his companies, AMETEK, had a return on investment matched only by IBM and 3M during the 30 years he was at the helm. He was a very successful executive and understood how business works and how to build a business. I learned a lot by watching him. We used to meet regularly and trade ideas.

I believe anybody who is halfway intelligent and who reads everything they can get their hands on and is willing to devote 60 to 80 hours a week to it can become successful. I learned what I learned while trading 300 stocks and watching how they developed. If you have that much love for what you’re doing and the time to devote to it, you can be successful. It’s just a matter of immersing yourself deeply into it.

What I used to do—before you could do research on the Internet—is order maybe 5,000 to 6,000 annual reports and carefully read them, looking for stocks that were seriously undervalued. That’s how I got the big winners. I took stuff that was incredibly underpriced and tried to figure out which ones would catch the public interest and move up. I was right about 80 percent of the time, and when I was right I was very happy with the results.

One time we opened a model account with $6,000 in cash, and within 30 days we had equity of $82,000. Then we got stupid. I am a human being after all, so I do make the same mistakes as other people. [Laughs] The next 30 days we lost half that and decided to cash out and quit while we were ahead. You really need to have all the experience I have to make that kind of money. It is not something I recommend for the amateur.

Opportunist: How much does it take to start building a portfolio?

Lux: You could start with $1,000, but you would need to be patient and understand where you want to go with it. It’s more a function of how much commission you have to pay. Most people who start with $1,000 play penny stocks and get caught up in a pump-and-dump scenario. I wrote my article, Anatomy of a Pump and Dump [at opportunistmagazine.com], so people could see how that trap operates. You have a small number of smart people transferring money into their pockets from people who aren’t so savvy about how Wall Street works. Sophisticated people are still doing that and taking money from people.

Opportunist: With all the SEC crackdowns in recent years, is fraud still a problem?

Lux: Yes, there is still a lot of pump and dump going on. I recently represented a company with very competent management and a very exciting business plan. In fact, I had rarely seen an executive team as capable as they were, and yet they got sucked into a merger deal where the defendants—let’s call them the defendants because they are being sued—had rigged the transaction to where they had control of the float in the stock. The stock went up about 10 times in three months. The defendant was spending about $4.5 million to promote the stock while simultaneously dumping the stock on the public. They made around $20 million, and three months after the stock hit it went down to 10 cents on the dollar.

Opportunist: How did that happen?

Lux: It was simply an instance of crooked people who knew what they were doing taking advantage of unsuspecting people. It has been very rewarding to me to be able to point out what the defendant was doing. Incidentally, the SEC and the FBI stepped in because these people apparently did a bunch of other companies this way before. Penny stocks, small stocks…these are very dangerous things if you don’t know what you’re doing.

Opportunist: What red flags should people be aware of?

Lux: I suggest that people read my recent article, Anatomy of a Pump and Dump, and visit my blogs [see below]. I have a book there about short selling you can get and also a 30-minute video that talks about the basic principles I recommend to pick stocks.

Opportunist: What inspires or motivates you?

Lux: I don’t think that way. On my desk I have different stacks of work to do for this company and that company, and some are more interesting than others. So, I’d say whatever sparks my interest in a company. I enjoy helping successful companies.

Opportunist: Which accomplishments make you most proud?

Lux: It’s kind of hard to pick one. I was happy to be part of that recent case where the FBI and SEC showed up. I really don’t think much about me. I think about the work and the goal and getting the job done. I guess I learned this from my father. He had that philosophy. One day he sat me down and said, ‘I want you to know that if you’re in a business meeting you will always know who the least important person in the room is.’ When I asked how I could possibly know that he said, ‘It will be you.’ You see, it’s really about the company and their goals and helping the people who are in the company, so I don’t think about what I’m proud of. I like to make money, obviously, but I don’t think about what I’m going to make…just that it’s a good thing to do. One time I was pitching a venture company that I am associated with and the pitch went well and then they asked me a question that just devastated me.

Opportunist: What was their question?

Lux: ‘Tell us about your background.’ I became flustered and turned beat red and explained that they needed to understand that it’s not about me; it’s about the company. That’s how I was brought up and trained. I believe it is the one thing that separates successful executives from those who aren’t. They care more about the company and they put the company first, not themselves. That’s how you must approach it. If you want to succeed you have to be focused on the goal.

Opportunist: What are your thoughts on the U.S. economy?

Lux: There’s a lot to worry about right now, and our country has too much debt. I am very concerned about small business and entrepreneurs. They have an uphill battle. On the other hand, there is even more opportunity for people with new ideas for doing startups and building companies. You can find more information out there about how to successfully build a company—whether it’s a startup or a billion-dollar company. In order to build something you can be proud of, that is going to last and be worthwhile for the economy, you have to understand all aspects of what you’re doing. I believe small businesses and startups are going to carry the day no matter how much the government gets in the way or the Federal Reserve builds up the debt. So, I guess you could say I am worried and yet I am optimistic.

When you go overseas and you’re in a country like Liberia, where there is near anarchy and 20 percent of the population has just been killed and those who remain are living for the next minute and nothing more, there’s no more social pretense. Life becomes very real and very valuable and very strong. I have also come to appreciate having a government that protects you, and for that reason I am very happy to pay taxes and see my money go to SEAL Team Six who took out Osama bin Laden. At least our country stands up for justice and freedom.

Opportunist: Where do you see yourself in five years?

Lux: Doing the same thing I am doing now, but more of it. I absolutely love what I do. I hate to go to sleep at night. I wish I never had to sleep. Like I told you before, the joke is on them because I would pay for the privilege of doing what I do…but they are paying me.

Leslie Stone is an award-winning writer/editor with more than two decades of experience covering business, finance and lifestyle issues for newspapers, magazines and online publications. Originally from Virginia, she currently resides in the Orlando area.

Lux’s Books on Amazon.com





Lux’s Blogs

http://www. investing-performance.com


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E-mail: Lux.investor@gmail.com