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Blog : Will the Penny Stock Snowball?
by John Whitefoot on December 12th, 2008
Looking out my back window at the four feet of snow piling up got me thinking of Warren Buffet. This fall an authorized biography about Warren Buffett, was published, The Snowball: Warren Buffett and the Business of Life.
With 883 pages of narrative and nearly 100 pages of footnotes, the author gives an exhaustive account of Warren Buffet the person, not Warren Buffett, the Oracle of Omaha. Though, she does throw in a number of financial stories that will please even the most discerning mind on Wall Street and Fleet Street.
For example, when Buffett was nine, he caught snowflakes in his glove and rolled them into a ball. Then he pushed that snowball across his lawn and into his neighborhood, watching it grow bigger and bigger and bigger.
A foreshadow of things to come perhaps? Buffet would eventually move on from shaping snowflakes to shaping companies and portfolios. Almost all of which, rolled into bigger and bigger companies.
And some of those companies started out quite small. He loved penny stocks, and most stock-pickers will be in awe of the bargains he snaps up in the book's early pages. But these days billionaires don't buy penny stocks.
That doesn’t mean you can’t buy penny stocks with the insight of a billionaire. As a young investor, Buffett believed in investing in great companies at discounted prices. He wasn’t really going out on a limb with that concept, but, unlike a lot of investors, he held onto that vision.
Buffet sold cheap stocks to purchase cheaper stocks. If, like a young Buffet, you have a small amount of capital to invest, you have to look for the greatest return possible. This may mean selling a good penny stock for a great penny stock.
How do you know if you should sell your favorite penny stock for what you consider a greater bargain? Know your penny stock inside out, and, on a piece of paper, set an intrinsic value for your penny stock and aim for that value.
But be flexible. If a more attractive opportunity presents itself then adapt your investment strategy.
That said, unlike most mid to large-cap investors, when it comes to penny stocks, diversifying your portfolio may not be such a great idea. While this flies in the face of common investing wisdom, we all know penny stocks do not roll the same way their larger peers do.
With penny stocks, its better to own a handful of stocks than a spreadsheet worth. Understand the company’s prospects and the ins and outs of their operations. This is the only way to understand your companies upside potential; and the best way for you to come up with your own intrinsic value. It’s easier to follow a handful of penny stocks than a massive portfolio’s worth.
Network television gurus say the average investor should diversify their portfolio to avoid risk. If they could, they’d yell at penny stock investors to diversify because, as we all know, penny stocks are risky.
All of these shouts of protestation are mute now seeing as a vast number of “safe” equities have tanked in recent years.
Sure, minimizing your risk level is a no brainer. The best way to do that is by staying informed and keeping up-to-date on your penny stock portfolio. It’s much easier to be knowledgeable about a smaller portfolio than a larger one.
Buying what you know is always wiser than buying a little bit of everything in hopes that you even out your losses. I’d sooner roll a few snowballs into larger ones, than get distracted and trip over a backyard full of smaller ones.