Look anywhere around Wall Street and investors will tell you never to invest in penny stocks. They throw around the term as if speaking about the plague. Penny stocks are guaranteed losses. Penny stocks are speculative and not worth investing in. I’ll agree somewhat with one of these statements. By and large, they aren’t worth “investing” in. They are however, worth trading.
If you’ve read this blog for any amount of time you understand my trading style and investment decisions revolve around doing pretty much the opposite any analyst thinks you should do. When all the analysts covering a stock say to buy, it’s usually at the top and when they say to sell, it’s usually at the bottom. Analysts aren’t as reliable as chart patterns and earnings reports so I only use them as a bellweather for spotting tops or bottoms. Of course, it’s very hard to predict the true bottoms and tops so I use a graduated buying approach. I buy into weakness (a value stock falling in price) and sell into strength (a value stock rising in price with a sell target based on earnings projections). There are simple formulas you can apply to most value and growth stocks to determine buying and selling points and I have detailed them in previous posts.
So why trade penny stocks? You see the ad in the upper right corner of the first post on this blog? That’s the blog of Timothy Sykes. If you don’t know who he is, I’m about to enlighten you.
Tim began trading penny stocks in college in the late 90s and through the dot-com boom and bust. He realized one day that these stocks all exhibited the same kinds of trading patterns day in and day out. He also started paying attention to conversations in message boards and boiler rooms around these stocks and within 4 years turned $12k into $2 million. He made thousands upon thousands of trades, taking profits when they were available but also losing thousands in the process all the while learning the ins and outs of trading in the “wild west” of the stock market.
He started his own hedge fund, Cilantro Fund and was the highest rated fund in his class. Dissolusioned with the industry, he closed his fund after several years of success (and several hundred thousand in losses as well), wrote An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund and started timothysykes.com to teach others how he made his fortune. Tim went back to his roots and (still being already financially independent) opened a new trading account with the same amount of $12k to show everyone that anyone can make money trading stocks. As of now, just a few short months after starting TIM (Transparent Investment Management) and detailing his trades openly on his blog, he’s already more than doubled his starting capital.
Investors that don’t understand how the OTC market works call it the Wild West. The reason is because the SEC doesn’t regulate Bulletin Board or OTC (over the counter) stocks as tightly as it does the NYSE, NASDAQ or AMEX. Due to this fact, there are people out there that will take advantage of naivete. These are the pump & dumpers you hear about. If you know how to spot them you can avoid them and for the most part its easy. You know that email you got about stock XYZ that sounded so promising…yep you guessed it, that’s a pumper. He’s hoping you go out and buy the stock he mentioned so he can profit by selling his shares to you, only to have the stock collapse in your face and leave you “holding the bag”.
