There is a lot of argument about investing. Some say you should only invest in blue chip stocks of well known and established companies. Some say you should only invest in pinksheets or penny stocks. Yes, blue chips are a pretty good idea. Most of the time. But there are so many people who lost all or most of their investment portfolios on all too familiar names like Enron, WorldCom, and Tyco. Tens of thousands of dollars lost. These were reputable companies! But with all the capital which money would allow flowing freely into them, these big boys got greedy, moved some numbers around, and they imploded.
So when you say that Blue Chips are better because they’ve been around longer or they have a track record, that’s fine. But like they say to a pitcher in baseball “you’re only as good as your last game.” Future performance is what will drive your future results. So while Blue Chips are maybe more stable than pinksheets, the pinks are much more manageable, allow much greater diversification, and are ripe with future potential. They also afford you the opportunity to learn these five lessons every beginning investor should know about the microcap market.
You learn about winning and losing: Stocks generally trade within a range. What many beginning investors get caught up in is the heat of the moment (uptrend) followed by the inevitable pullback (downswing). If you bought GE (1) on March 31, 2010, GE was trading around $18.20.Towards the end of a nice upward swing. GE closed at $19.50 two weeks later (4/15/10) and then began a precipitous decline. On 5/7 GE closed at $16.88. On 5/12 back up to $18.44, but if you didn’t sell out then and take your small gains, you probably lost out or are still holding on. July 2 saw a close at $13.88 but GE still to this date 10/22/10 has yet to breech those levels of where you got in at $18.20. In March. So when people say things like “you hold onto penny stocks for years and nothing happens,” at the very least you won’t be paying $18.20 a share for these stocks.
You’re putting up considerably lesser cash: Which brings me to my next point. To get any kind of a pop on your money, you have to have money to put up (i.e. – ‘you’ve got to spend money to make money’) that statement is true. So taking the GE example above, if you bought 100 shares of that stock at those levels, you’re talking about eighteen hundred bucks. Not chump change. Now if you rode that pony down from March until May 12, and sold out, your total return would have been $24. Plus whatever transaction fees you have to pay. Probably a minimum $7.95 a trade. Okay, so subtract $7.95*2 (buy and sell) and that’s $15.90, minus your $24 return and you see that for putting your capital up for 45 days, you would have made $8.10 in this hypothetical situation. Not great. However if you’re investing in a pinksheet stock that costs, $.008 you would have been able to buy 10,000 shares for $80 plus your transaction fees and if and when this stock goes to $.02 you’ve already more than doubled your investment (and paid for the transaction fees).
You get good at seeing through the slog: Most of your investments in pinksheets though will not go from $.008 to $8.00. Or even $.02! Many of your investments won’t do anything for a while. This is good if you’ve got a lot of time, because you haven’t put out a lot of capital. You also get a lot more selective of the stocks you put money into. Be warned, your investmets in pinksheets could dwindle to nothing. But at the very least you’ve gotten to play in the markets without putting up egregious amounts of capital.
You get good at doing your due diligence: Which means you get a lot more selective about the stocks you put money into. You do your research on the front side so that even if your stock gets manipulated down or pushed around, you are confident that you will get returns on your investment one day. This necessary due diligence and prodigious research will more than outweigh the time spent in the investment.
You learn about getting greedy: There is such thing as too much of a good thing. If your $.008 investment goes to four cents, you are slapping yourself high-five, thinking that you’re the smartest dude around. If you’ve put up $800 and have 100,000 shares of this stock that’s gone to four cents, you should sell half. I know that goes against every instinct in your body which is telling you to throw everything you’ve got into this investment. It’s going up! But you don’t want to get greedy. You’ve just turned $800 into four thousand dollars. Take two thousand off the table and let the rest ride. If it makes it to a dollar or ten dollars, you may kick yourself but at least you’ve got your initial investment back. Because if your investment goes to four cents then to eight cents then back to half a cent, you’ll be left with five hundred bucks worth of shares and a pain in your heart just to make back what you’ve put in.
The Pinks aren’t the best game in town but for the small time investor who’s just learning their way around, microcap or pinksheet stocks may be your entry into the game without leveraging that you have.