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An investing lesson to heed following the recent Woodbois share-price rise

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If we believe one claim, the Woodbois share price is set to soar by 1,000%. Or is it 2,000%? Yes, that’s what one sharp-eyed The Motley Fool reader spotted last week.

It was a paid ad, in among the top search results on the company name. And it made both predictions at different points. What valuation techniques did the analyst use, and what figures did they offer to back up their bold assertions?

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Well, actually, none. There was no real analysis, just the bare claims. “Trust me, I never go wrong, fill your boots.” It was that kind of stuff.

Diverse insights

Anyone offering actual stock recommendations in the UK needs to be properly regulated. And I didn’t need to check if this one is, as the kind of claims they made would never get past a regulator.

And that makes me want to stress an important point about our non-subscription content here at the Motley Fool. In it, we don’t make stock recommendations. Instead, we writers share our personal thoughts on shares in relation to our own investments and our own portfolios.

The Motley Fool approach to investing is based on doing our own thorough research. Part of that is absorbing the thoughts of other investors, for sure. As it says at the bottom of every one of our free articles: “Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.”

But buying on the back of a short article without doing the follow-up research? Well, that could be reckless.

Woodbois share price

But let’s get back to this 1,000% claim. It highlights for me one of the biggest risks with penny shares. It’s the “pump and dump“.

Woodbois has a small number of major shareholders. That means the free float of shares, for private investors to buy and sell, is relatively small. And it makes it possible for someone with less than ideal scruples try to manipulate the Woodbois share price.

The approach is to buy some, and then try to pump it up by making outlandish claims of how it’s about to skyrocket to massive valuations. It then might only need a relatively small number of new investors getting in to push the share price higher.

Then comes the dump, which is just what it sounds. Sell the shares before the bubble bursts.

Penny stocks

Pump and dump really only works with small companies with limited numbers of shares freely trading, usually at penny stock prices. Imagine trying it with, say, BP on a market-cap of more than £80bn and huge numbers of shares traded every day. There’d be no chance.

No, it has to be something small. Ideally the shares will sell for just a few pennies, and there are far fewer daily trades.

So will the Woodbois share price climb further or fall? Or, more importantly, how can we get any idea? For me, it has to be about fundamental valuation, revenues and profits. And I want financial justifications for any predictions I see.

Then it’s a case of doing my own research and forming my own opinion.