TODAY’S THOUGHTS
"Today's thoughts" is something I send out nightly to our members. It usually involves the performance of our current holdings or the performance of the markets. This is tonight's "today's thoughts". I thought it would be good read for everyone:
You know, I haven't always been a penny stock or micro-cap investor. It's actually something that I frowned upon
until only a couple of years ago. I used to think that penny stock or micro-cap traders were on the lowest ring of
market totem pole. I thought of it as a cesspool where individuals who were, more or less, casino roulette players
could come and get their daily fix while they prepared for their day at the mercy of the wheel.
For the most part, I think I was correct in my assessments. Penny stocks do tend to attract the scoundrels, scum
bags and general nefarious types who smell of odd substances and carry around heavy backpacks. It's a lot easier
to manipulate a stock that has a market cap of $10 million than a $5 billion company. They are unregulated, for the
most part. And could be considered the wild west of Wall Street.
In studying my trading over the 16 years that I've been doing this, trading literally thousands of names and millions
of shares, I noticed one thing that made the light bulb shine like it was hooked up to a nuclear reactor. In all my years
of trading, as the market cap got smaller, my success rate increased. Not only was my batting average of winning
trades much better, but the gains I made on those trades were far superior to say mid-cap or large-cap stocks.
I can now attribute this to a number of reasons that were unbeknownst to me prior to say 2008:
1. Penny/micro-cap names are a lot more transparent in their price movement than stocks with tens of thousands of
participants. This makes the price action "cleaner". Penny stocks tend to tell the truth much more readily to those
who are experienced enough to decipher what they are trying to tell you.
2. The participants in penny stocks are almost exclusively individual investors. If you know how they think, you've
got a leg up on them. This goes hand in hand with the price action. Again, their actions are transparent and easier
to decipher than the daily moves in Intel. I touched on this fact extensively a couple days ago in a blog posting
3. Good research goes a lot further in these stocks. I like to think of penny stocks as option contracts without the
drawback of time value eroding the longer you hold. This allows me the confidence to sit tight, while the research
that I know will be proven correct, slowly comes to light. Once other investors beginning grasping the opportunity,
200 and 300 percent gains become simple. Gains of 500 percent to over 1000 percent are possible in these names.
Good luck finding those types of returns with any frequency in the mid to large cap space.
After trading literally everything under the sun, from swaps to options to futures to bonds to every stock under the sun,
I have ended up here. I like it so far. I think I'll be here for a good while.
Do bear in mind, that the sleazy feeling you get when you come across a lot of the penny stock sites out there are
your instincts...and they are right. It is a sector that is filled with empty promises. Be careful where you tread and
clutch your wallet tightly in the dark alleys. I've known of more than one investor who has left penny stock land with
rabbit ears and a black eye...don't be one of them.
