This is what they want you to believe: To be a successful investor, you should buy only big-name stocks and hold onto them for years. Nothing could be further from the truth. What they really want from you is control of your money. They want you to leave it with them and forget it.

And here’s why they hope you’ll never bother to challenge the myth…

Your broker makes money whether your portfolio soars or falls. All he cares about is that you’re buying or selling stocks. He takes his commission, and you’re left with stocks that could be profitable, but are more likely just the “hot pick” of the week that will lead your portfolio down the drain in no time.

But as you’re about to see, you can do a lot better. You can win at the stock market when you use the power of penny stocks to your own profitable advantage. And better yet, you can keep more of your money without worry that your broker’s advice might be costing you more than just your cell phone minutes…

Exposing the Lies

First, it’s important for you to know that the easiest way to make money in the stock market is by investing in penny stocks. And there are cold, hard facts to back up this claim.

The smallest stocks on the market — those with market capitalizations of less than $1.5 billion — have dominated the market recently, outpacing the large caps by a large margin so far this decade. But what many investors may not realize is that this is not a fluke. Historically, smaller stocks have always led the market.

A famous study conducted by Ibbotson Associates in the 1990s found that these small stocks outperformed all other stocks 56% of the time between 1926–1996 — including the blue chip stocks that get all of the media’s attention. The average return in any given year was 14% for small stocks. It was just 9% for large stocks. And the longer you held your small stocks, the better off you were.

Since 1926, there has never been a period of 25 years or more in which investing in large-cap stocks have proven to be more lucrative than investing in small-cap ones. Of course, there are many reasons for these great small-cap returns.

First of all, there are a lot more small-cap companies on the market. About two-thirds of all the companies on Wall Street have a market cap of $1.5 billion or less. So as a penny stock investor, you have a much wider universe in which to find moneymaking opportunities.

And because there are so many small companies, the major brokerage firms and institutions don’t have enough analysts to cover them all. So they simply ignore some of the fastest-growing companies on Earth. As a result, you can buy into some tremendous businesses trading for virtually nothing.

Smaller companies can also adapt to the changing marketplace and react quicker than their large-cap peers. Think about it this way: It’s a lot easier for a $200 million company to double than it is for a $255 billion company to do the same.

Best,
Greg Guenthner
September 12, 2008

Investing in the Small-Cap Market was originally featured in the Penny Sleuth.

There are several accusations about penny stocks that can make an investor hesitant and timid to invest because of a “risky no-gainer gamble” stereotype. These statements are exaggerated and erroneous…

Learning the truth about what you heard in the past…might be a wealthy opportunity for the future…

Here is the top three…

Misconception #1: Penny stocks are priced low because they are poor performing companies.

Penny stocks are usually small and newly created companies. While still trying to get established, penny stocks are analogically infants and toddlers compared to large-cap adult companies. With great parental guidance from a superb managing team, penny stocks can hold a promising future.

Hints: Do your research! Get background information. There may not be an abundance of information on the company because of lack of media attention. So research patiently and vigilantly.

Check if the managing executives and board members are respectable and passionate towards the company. A positive staff is always going to produce great work and show that through the company’s bottom line.

Make sure the company is in a growth position and if they are compatible with future trends and markets. A company’s willingness and desire to expand is a good indication of the value of a company to potentially rise.

Another good way to analyze a company is by reviewing a company’s financial reports and accounting sheets. 10-K annual reports are a great source to attain information. Comparing and analyzing numbers throughout the years will show the “guts” of a company that you won’t read or hear about in the news. However this process can be challenging…

In compliance with SEC rules, companies have to report their financial records. Inside executives know that these records are easily accessible and can show the value and worth of the company. As a loophole, firms will try format the reports differently every year to make the evaluation more difficult and tedious to analyze.

Misconception #2: Penny stocks are all frauds.

Some investors have fallen victim to the “pump and dump” scheme — a system where spammers will buy a stock and then hype it up by sending out positive e-mails and internet ads causing the price of the stock to jump. While the price is up, spammers will sell at a net gain, causing the price to fall, leaving their victimized investors holding the bag.

Hints: Go back to the basics. One of the primary rules to investing…never…ever…invest on tips and rumors. Chances are, your source is wrong or you’ll get in too late…

Do your research! Make sure you know what you are investing in. Make sure your sources are honest and ethical and act upon the interests of its investors and clients. Tips are only ideas. Investments should only be made on your own personal conclusions.

Misconception #3: Penny stocks will usually generate a net loss.

Every stock bares risk. Whether they are priced from $0.01 to $1,000, or a microcap or a large-cap company. Barriers to entry and competition are high these days… Since a majority of penny stocks are young and small companies, its common for penny stocks to default under a competitive market.

In fact, penny stocks are one of the fastest and easiest ways to make double or even triple your money.  It’s a whole lot easier for a $2 stock to jump to $4 than a $60 to $120.

Hints: Do your research! Are you starting to see a pattern here? Make sure the industry sector of the company is compatible for future market trends. Analyze the company by generating different scenarios. For example… Would the company be affected by high oil prices? Is their innovative product going to be the high in demand? How would they perform in a recession?

Generally, the more risk you have, the higher the yields can be. If you enjoy risk and want to make big-time returns, by all means go ahead and invest irrationally. But if you are risk-adverse, go back to the basics and diversify your portfolio.

There you have it, three truths to investing…

These common misconceptions are the response to investor’s bitterness of poorly managed securities. For what it’s worth, that’s up to you. But with sufficient research and a promising future market, penny stocks can yield gains far greater than you could have imagined…

Regards,
Mark Louie
August 11, 2008

Beware of Penny Stock Misconceptions was originally featured in the Penny Sleuth.

But first let’s understand where “cap” comes from.

When analyzing a company, the most important thing to look at is how much it is worth, or at least how much the market thinks it is worth. That’s called the company’s market capitalization, or “cap.” Here’s how it is figured out…

Say Company X has 100 million shares outstanding and a price of $12 per share. That would give it a market cap of $1.2 billion. The market cap is just the number of shares outstanding multiplied by the cost per share.

But the classification of company sizes is the key idea. For instance, a large-cap (market cap of over $10 billion) cannot grow as much and as fast as a small-cap ($100 million–1.5 billion). Certainly, a microcap (under $100 million) can grow even faster, and a mid-cap ($1.5–10 billion) falls somewhere in between.

[Side note: For our purposes, we’ll combine small- and microcaps… So everything under $1.5 billion will be a small-cap.]

History sides with small-caps. Rolf Banz made a famous study back in the early 1980s, called “The Relationship Between Return and Market Value of Common Stocks.” In this important report, Banz found that over the 50-plus years he studied, the smaller the company, the larger the average return. This held true for all the years he studied, regardless of whether the market ended the year up or down.

Here are the exact results:

As you can see, if you had invested in the smallest companies over that period, you would have made nearly five times what you would have had you invested in the blue chips.

That’s the simplified reason why we love small-caps. So why don’t we call ourselves the Small-Cap Sleuth? Well, we like to break it down even further. Let me explain…

Penny Stocks vs. Small-Caps

Let’s return to our previous example…

Company X has a market cap of $1.2 billion (100 million shares times $12 per share). That’s a small-cap company, but not a penny stock. Penny stocks are defined as anything with a market cap under $1.5 billion (hence, they are all still small-caps) and a price per share under $10. So you can see Company X doesn’t fit both requirements. Therefore, we wouldn’t recommend it.

Now, let’s say Company X has a 2-for-1 split (meaning if you owned one share before the split, you’d own two after). Now there are 200 million shares, but the share price is only $6. That would make it a penny stock. It now falls perfectly within our range.

So why would we recommend only penny stocks? Well, there are a number of factors…

First, there is market psychology at work here…

When certain investors see a $6 stock, they think it’s cheap. This may not be the case. If it had the same market capitalization at $50 per share, the investor wouldn’t think that way. So penny stocks look considerably cheap compared with other small-caps.

That’s one reason. Another is buying power.

With penny stocks, it is far easier to buy more shares as well as diversify between companies. Say you have four companies you’re interested in buying, but only have $100 to spend. If they are all $50 a pop, you can’t do it. Now, if they are all $5 per share, you can get into all of these positions. Thus, buying a diversified portfolio.

The third reason for picking penny stocks over more expensive ones is the price itself.

If a company is sitting at $50 per share, it takes $5 swings to really start seeing profits or losses. With a $5 company, it takes only about 50 cents, which can easily be done in a day of trading. The smaller the price per share, the larger the price swings. That’s how short-term penny stock traders have been making millions over the years.

Whether you are a short-term investor or in it for the long haul, you can see that small-caps, and specifically penny stocks, are the way to go.

The truth is we love small-caps. It’s far easier for a $100 million company to double than it is for a $100 billion one. It’s as simple as that…

Sincerely,

Jim Nelson
June 30, 2008

P.S.: Over the years, many have tried to refute Banz’s study. Critics say that it doesn’t factor in companies that go belly up and fall off major exchanges. There is some merit to this. So instead of blindly picking small-caps to invest in, it’s good to have someone in your corner.

Investing in Small-Caps was originally featured in the Penny Sleuth.