On Nov. 19, 1984, you could have picked up shares of the emerging biotechnology firm Amgen, Inc. (AMGN: NASDAQ) for $3.63.

Those shares rose steadily for the next 20 years and were worth more than $85 as recent as 2005. Taking into account Amgen’s five splits over the past 23 years, you can knock that original 1984 price down to about nine cents a share.

It’s almost impossible to believe that a company that would cost you pennies could turn into a $100 billion pharmaceutical giant specializing in the treatment of rheumatoid arthritis, anemia and psoriasis.

But Amgen did it…and investors who saw its potential laughed all the way to the bank.

That story — and so many others just like it — is pretty recognizable. Replace the company’s name and a few numbers and dates, and you have just about everyone’s reason for becoming interested in the stock market.

If you didn’t think the market could make you rich, why would you waste your time with it? The fact is, only two small groups of people actually do get rich with stocks…the brokers and the penny stock enthusiasts. Let me explain…

The brokers make money off of trading stocks. Whether you buy them or sell them, your broker takes his commission. He’ll take it on big winners and big losers. He’ll take it on trades that breakeven. As long as he gets paid, that’s all that matters.

So what does he do? He tells you to buy blue chip companies — the large, established behemoths that can only go up or down a few dollars here or there. Why would you want to do that, because the broker says it’s a good idea, and he has made a bunch of money in the market, so he must be right. Wrong! Ignore those suits.

What about the penny stock enthusiasts? How did they strike it rich? Well for starters, they don’t listen to some commission-hungry broker. They find companies like our example above. You can’t get much smaller than nine cents a share. While that one was truly the best of the best — a top tier example — it’s not alone. Many others have done just as well.

You already know the list of names that started out as penny stocks: Wal-Mart, Starbucks, Microsoft, etc… But, those aren’t flukes either.

In a famous Tweedy, Browne report back in 1983, every publicly traded U.S. stock was grouped by size. As the size of the companies in each group gets larger, the returns are smaller. The smaller the company, the larger the return. Obviously, those who invest in small companies do quite well. You could say small-caps offer a higher reward than their larger counterparts.

Let me put it this way: If you want to continue to break even (at best) while your broker gets ever richer, that’s fine. But if you want to invest in a few penny stocks and hope one becomes the next Amgen, I’m with you.

Sincerely,
Jim Nelson
September 3, 2008

Jim Nelson

Jim Nelson is the managing editor of Penny Sleuth. He has been playing the stock market since he was 14, always with a preference toward smaller companies. He has honed his stock picking skills at Agora Financial since 2004, effectively combining a growth and value approach. Like Greg Guenthner, Jim also contributes to Penny Stock Fortunes on top of bringing you the Penny Sleuth every weekday.

Special Report: Imagine Getting Rich as Ignored Stocks Soar- How you could turn $200 into $1.2 million!

More on this topic (What's this?)

FDA Strikes Another Blow to Amgen’s Anemic Drug Sales (The Wikinvest Daily Angle, 8/1/08)

Adding Amgen to Secular Trends Portfolio (Epiphany Investing, 9/16/08)

Jim Nelson Says the Smaller the Company the Larger the Return (Contrarian Profits, 9/4/08)

Read more on Amgen, What is a stock? at Wikinvest

View articles by Jim Nelson