1.) They’re Riskier Than Other Investments
While this was once true, if you’ve been following the economy recently, you know that’s no longer the case. In an age when blue chips like AIG or Lehman Brothers can swing just as wildly as the crankiest penny stock, even the big names are no sure thing.

To be fair, penny stocks are far from risk-free. But it’s that risk that brings with it the reward potential penny stocks are known for.

2.) They’re Hard to Buy
Just in case this myth wasn’t busted when I wrote Taming the Wild West of the Market back in May, I’m back to reiterate.

Buying penny stocks isn’t necessarily any harder than buying another type of investment. You just place a trade with your broker, or purchase the shares through an online brokerage account, and watch the magic happen. Your broker might have a different commission structure for penny stocks, so as always, it’s best to ask your broker about how trading penny stocks will affect your brokerage account.

3.) You Have to Be An Insider to Make Money with Penny Stocks
Believe it or not, being an insider doesn’t garner you much of an advantage as a penny stock investor. That’s because Wall Street is way to preoccupied with more expensive stocks to give penny stocks a second thought.

4.) OTC Stocks Aren’t as Legitimate as Blue Chips
Don’t think that just because a stock isn’t traded on a major exchange like NYSE or NASDAQ that the company is somehow defective.

In fact, the opposite can sometimes be true. Exchanges like NYSE have burdensome listing fees and requirements that preclude smaller companies from getting listed. Some of the most compelling investment stories were those of small companies listed on over-the-counter services like OTCBB or Pink Sheets.

And don’t think that OTC stocks are any more prone to fraud than listed companies are. Stocks listed on services like OTCBB and OTCQX have heightened listing and disclosure requirements over the past decade to help keep things transparent for investors.

5.) There’s No Place for Penny Stocks in My Portfolio
If you think that penny stocks don’t belong in your portfolio, maybe you should take a second glance at what your investment objectives are. While penny stocks have traditionally been riskier choices than their listed counterparts, today’s stock market is bringing that precept into question.

Most portfolios have at least some room for higher-risk/higher-reward investments like penny stocks. That’s especially true if investing in penny stocks doesn’t impinge on your retirement money.

Cheers,
Jonas Elmerraji
November 7, 2008

The Top Five Myths About Penny Stocks was originally featured in the Penny Sleuth.

It might sound cliché…but I’ve found tangible proof that there’s some truth to those stories. At least one of Wall Street’s most trusted companies is pulling the wool over your eyes. It’s everything short of a deliberate attempt to steer you away from the stocks it doesn’t approve of.

I’ll explain in a second. But first, a little background is in order.

The story starts with a man named Philip Fisher.

A stock analyst who survived the Crash of 1929, Fisher made his mark with a landmark book, Common Stocks and Uncommon Profits. In fact, it was the first investment book ever to make the New York Times bestseller list. And while most people like to associate Warren Buffett’s investment style with Benjamin Graham’s, the Oracle of Omaha admits that Fisher inspired him as well.

That’s partially because Fisher was a strong advocate of buying and holding. He once said the best time to sell was “almost never.” Of course, he didn’t mean you should blindly hold onto losing stocks. He meant that if you did your research right before you bought — and paid attention thereafter — you’d never have to worry about selling.

So it’s pretty amazing when you realize that Fisher was primarily a growth investor. He didn’t care about a company’s fundamentals…he cared about its business. He loved companies that were “highly speculative and beneath the notice of conservative investors or big institutions.” In fact, he famously bought Texas Instruments and Motorola long before they were household names — and even held Motorola until his death.

In Common Stocks and Uncommon Profits, Fisher spelled out 15 questions he used to evaluate a company. They were pretty open-ended and could be subject to interpretation. They were not, as he put it, “determined by cloistered mathematical calculation.” They were:

1. “Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?”
2. “Does the management have a determination to continue to develop products or processes that will further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?”
3. “How effective are the company’s research and development efforts in relation to its size?”
4. “Does the company have an above-average sales organization?”
5. “Does the company have a worthwhile profit margin?”
6. “What is the company doing to maintain or improve profit margins?”
7. “Does the company have outstanding labor and personnel relations?”
8. “Does the company have outstanding executive relations?”
9. “Does the company have depth to its management?”
10. “How good are the company’s cost analysis and accounting controls?”
11. “Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?”
12. “Does the company have a short-range or long-range outlook in regard to profits?”
13. “In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholder’s benefit from this anticipated growth?”
14. “Does the management talk freely to investors about its affairs when things are going well but ‘clam up’ when troubles and disappointments occur?”
15. “Does the company have a management of unquestionable integrity?”

Now, I’ll admit, there’s nothing groundbreaking here. Fisher’s 15 questions are fairly well known, and you can find them or slight variations of them all over the Internet. But I recently discovered that some of Fisher’s wisdom has been purposefully been withheld from investors. In fact, one of Wall Street’s most trusted Web sites glosses over some of what Fisher had to say.

You see, Fisher also listed five “don’ts for investors”:

1. “Don’t buy into promotional companies.”
2. “Don’t ignore a good stock just because it is traded ‘over-the-counter.’”
3. “Don’t buy a stock just because you like the ‘tone’ of its annual report.”
4. “Don’t assume that the high price at which a stock may be selling in relation to its earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price.” (Or put simply, price-to-earnings isn’t everything.)
5. “Don’t quibble over eighths and quarters.” (That is, don’t stress over a few cents difference in price.)

Please pay attention to No. 2, in which a man hailed as one of the greatest investors says there’s nothing wrong with trading Bulletin Board and Pink Sheet stocks.

I ask you to pay attention, because the good folks at Morningstar.com think you shouldn’t know that rule.

It’s true. Its Web site has an Investor Classroom, which includes a profile of Philip Fisher. The article patiently explains his love of growth stocks. His 15 points are spelled out in detail. And then it goes on to paraphrase Fisher’s “don’ts” — all three of them. Not five…three.

Any bets on which ones are missing? Here’s a hint — they’re the ones that have nothing to do with fundamental analysis or exchange-traded stocks. See for yourself at Morningstar.

Now, I know — Morningstar can easily claim it’s doing this for investors’ own good. That over-the-counter stocks can be risky…and discounting fundamental analysis may encourage bad research.

But whatever Morningstar’s reasons, one thing is clear — this website is not giving you the whole story on Philip Fisher’s investment philosophy. Yet if it worked for him, why can’t it work for anyone else?

Regards,
Greg Guenthner
September 19, 2007

P.S.: As we all know to make real money in the stock market, you have to ignore Wall Street and their lackies (Morningstar.com, the Wall Street Journal, etc.). The reason is simple… We did, and saw this “forgotten market” bring in an average gain of over 25,000%.

Investing in Bulletin Board Stocks was originally featured in the Penny Sleuth.