SuperiorInvestor Blog

One type of stock that always receives a lot of attention is the so-called “penny stock”. Penny stock was a term used to describe any stock under $10 at one time, and very few brokerages would even allow trading in them. Penny stock now refers to “sub-penny stock” in most cases. Most sub-penny stocks are sold through a privately held company known as the Pink Sheets.

Although Pink Sheets sells most of these stocks, they have some pretty significant warnings about their purchase. One of the most telling examples of the risk is:

An investment in an OTC security is speculative and involves a high degree of risk. Many OTC securities are relatively illiquid, or “thinly traded,” which tends to increase price volatility. Illiquid securities are often difficult for investors to buy or sell without dramatically affecting the quoted price. In some cases, the liquidation of a position in an OTC security may not be possible within a reasonable period of time.

Basically, when a few people buy a penny stock, the stock price goes up accordingly. For this reason, penny stocks are custom made for fraudsters who operate online. They generally search for clueless newbie investors who don’t much about the technical aspects of trading, and they sell them on the idea of buying stock. The people pumping the stocks are the ones who gain when a sucker buys.

The number of rogues penny stock websites is growing. One of the most common tricks for penny stock pumpers to use is to hype these irregular companies and stocks wherever they can find a free place to spam. Ignore all of it. When you see a stock that is selling for 1/10th of 1 CENT, you better believe you get what you pay for. It’s that “cheap” for a damn good reason. Steer clear.

Google, who’s always adding something, recently added an interesting service that is similar to Yahoo Finance, but takes a slightly different take on things. Google integrated Google Finance right in with their results, so typing in a stock symbol in the search button will return the page from Google Finance at top. For example, if you were looking for the New York Times stock price, you can simply type in NYT in the Google search button and click Search.

Click on the highligted symbol in the first match and you’ll be taked to a profile page on Google Finance. Once inside, you’ll see a profile of the company. You’ll see a number of unique features like which blogs have posted about the subject. Also, run your mouse over some of the options and you’ll see popups with extended information. The bios of companies include executive pictures and compensation, as well as much more. Definitely check out the new Google Finance features, I think you’ll be impressed with the service.

Warren Buffett is the most noted of the Fat Pitch theorists, and with good reason. He’s currently the second richest man in the world, and the richest one who did sheerly through investing. One of the main concepts he always espoused was waiting on the “fat pitch” before swinging, and making sure he swung for the fences when the time was right.

Let Buffett explain, as he did in his 1997 Letter to Berkshire Hathaway shareholders:

Under these circumstances, we try to exert a Ted Williams kind of discipline. In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his “best” cell, he knew, would allow him to bat .400; reaching for balls in his “worst” spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors

Warren Buffett never took that trip to the Minors, and you don’t need to either. When you’ve thoroughly researched a stock and you’re sure you’re making the right choice, bet heavily on it. This is one of the primary reasons Buffett is so rich and other people aren’t. People are able to pick winners on Wall Street all the time, but they rarely are invested in them with full commitment. A $10,000 investment may turn into $70,000, and that’s great. But if you were able to invest even more, the effect could be life-changing. If you’re too diversified, you run the risk of not being able to gain from a stock that does very well.

When the fat pitch comes, you’ll know. You need to be ready by hoarding your cash and closing out of losing positions. Put your money into one big position and you may come out a winner. This is especially true if your portfolio is very small, like most beginning investors.

One of the biggest keys to look for when choosing a stock is to see how companies in the same sector are doing. Generally, companies in the same sector will move in lockstep. It’s not hard to understand why. If business conditions are favorable for one company in a sector, then probably everyone will feel the benefits. An example of this would be Nokia and Motorola going up on the news that raw material costs have been reduced and worldwide sales have gone up. As you can imagine, events that effect Communications Equipment manufacturers in the Telecom sector, will almost always affect both Nokia and Motorola.

Of course, the sector comparisons can take you only so far.  Nokia and Motorola might both benefit from a worldwide lowering of prices of raw materials, but one of the companies will probably be much more adept at exploiting that advantage.  Companies are still run by management teams comprised of humans, and with any human enterprise, some people will outperform others.

What would you look for in the Sector?  You want to see strength in the stock sector of any stock you plan on investing in.  You also want your company (your guys) to be on the ball and serious about doing business.  In fact, you invest only in the company with the best management team.  Look for integrity in reporting results, a strong operational background, and some sort of plan for both the present and the future.  A company that is strategically planning will outperform ones that are merely goosing profits for the short term.  If you find the top producer in the top-performing sector, you’re almost guaranteed to have a winning stock.  Hold out for that every time.

If you’re new to investing, and you’re looking for information about investing online, I caution you to be aware that a lot of the information you get could be biased. In fact, much of what you read may be produced for the simple reason of getting you to buy the stock. The stock market sector is very bad for spam practices, and in particular sub-penny stocks are hyped relentlessly through email and website spam constantly. Don’t fall for it. How can you tell an analysis of a stock might be hyped? The language usually gives it away.

A stock is never “going up” according to a hypester. Instead it “explodes” or “skyrockets”. In fact, every word the hypester uses is an emotionally charged one, designed to get you to jump lock, stock, and barrel into your purchase. Why? Because human nature functions on some basic levels, and excitement is one that causes people to buy things. If you think that “the train is leaving the station”, you’re more likely to want to “jump on board”. Continue reading “Beware of hyped stock advice” »