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Blog : Investing Outside of the Penny Stock Box
by John Whitefoot on April 20th, 2007
For the most part, and really, its wise advice, if you want to make money in the stock market, you should invest in sound, profitable companies operating in stable industries. Most analysts will tell you that over time, your ‘sound investment will reward you with solid returns.’ And clearly, no one would argue with that.
At the same time, a lot of seasoned investors will also tell you to avoid penny stocks, because they’re too risky. And they’re right, they can be risky; but so what? You can also lose money on a blue chip, so ‘risky’ is pretty subjective.
Others may also alert you to the possibility that your penny stock might turn out to be a one-hit wonder, and not something you want to hold onto. "Any company that has a product that’s very popular and very hot with consumers and retailers is always susceptible to be a one-hit wonder," noted one successful CEO.
Truth be told, there’s nothing wrong with finding a penny stock that has one stellar quarter. The key is selling at the right time, knowing your limits, and not being greedy.
My experience has taught me that most investors don’t hold onto penny stocks for years on end. Instead, they sell their position after a few quarters. While that may seem normal to penny stock investors, buying and selling with that kind of frequency would make most Wall Street Suits heads spin like a whirligig.
Like their large cap peers, there are a lot of penny stock investors that stack their portfolios with safer stocks. They also top off their accounts with riskier companies that have an attractive, albeit outside chance at success.
And it’s the ‘outside chance’ stocks that can make the greatest short-term returns. Yes most fades and crazes are short lived. But somewhere out there is a penny stock company building a better mousetrap.
But that which is obvious after the fact...may not be so obvious at first. If I was a betting man, chances are I would have said that to stay clear of the hula-hoop, Cabbage Patch Kids and Crocs. I probably would have steered you toward the Edsel.
Who knew that pop culture would have such a massive impact and that fashion, not function could rule the markets?
If you’re not the Amazing Randi and have difficulty locating penny stocks that are going to turn the world on its head for 15 minutes, then look for penny stocks that have a captive audience.
For example, one penny stock company I am aware of creates a product that must be retrofitted on all ships over 3,000 tons between 2007 and 2011. That’s a clear example of a penny stock with a captive market.
Remember, you don’t necessarily buy a penny stock because you like what they do, you buy a stock because you like it’s potential. You buy to make money.
In 1983, you may not have wanted to find a Cabbage Patch Kid with your name on it under the Christmas tree. And today, you may not walk down the street in purple Crocs.
So, don’t limit yourself to companies that you 'like'. Expand your comfort zone and invest outside of the penny stock box.