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Blog : Penny Stock Investing: It’s as Easy as Golfing like Tiger Woods
by John Whitefoot on July 6th, 2007
I’m sure there are some out there that think investing in the stock market, like a round of Texas Hold’em, is based on luck. Sure you can unexpectedly strike-it-rich with a penny stock you thought was dead in the water…but the odds of that happening are quite rare.
Granted, some of what makes a great investor is natural talent, beyond imitation in the same way countless hours of golf practice won't turn me into Tiger Woods.
But alas, there are some things you can copy. And really, whether you buy penny stocks or pad your portfolio with Berkshire Hathaway – they apply across the board.
Three of them include: discipline in the price you pay for an investment, keeping your turnover low, and focusing on your best ideas.
Lessons from the past…Rumor has it that the Great Depression was a terrible time to own stocks. Or…was it? From 1929 to 1939, stocks delivered a negative return. Small-cap stocks were hit the hardest, losing more than 5% a year on average. However, two money managers noted recently that a little discipline - paying attention to prices paid – would have given you good returns, even during the Great Depression.
They show that waiting just two years - until 1931, instead of 1929 - turns negative returns to positive ones. Suddenly, small caps beat out the alternatives. Between the market lows of 1931 and 1939, small cap stocks outpaced bonds.
How can that insight help you buy penny stocks in today’s market? If you could buy all small-cap stocks and get a 9% annual real return during the Great Depression, think what you could do by sticking with sound penny stocks with solid fundamentals in a friendlier investment environment.
Don’t want to do the research needed to become a great stock picker? Then perhaps you need a little patience. Unfortunately, investors, as a group, are not patient; flipping stocks with great frequency – and living by the maxim, “buy high, sell low.”
Join the minority of investors and hit the books with a little research. In doing so, you’ll avoid chasing up over valued, hyped stocks and you’ll hunker down with tomorrow’s opportunity today.
If you base your penny stock investing in sound research and patience, you’ll also discover that you don’t flip your stocks quite as often. One research study exploring the link between turnover and performance, noted "Unsurprisingly, those funds with the highest turnover deliver the worst performance, while those funds with the lowest turnover do the least damage to net risk-adjusted returns."
Pay attention to the price you pay and you can make good returns, even in a bad market. And don't chase past returns. Instead, be patient with your investments and give them time to bear fruit.
Lastly, focus on your best ideas. History shows that successful investors focus their money on their best ideas.
While you may want to invest in a company that is diversified, the last thing you want is a portfolio with 100 stocks. It’s better to know 25 penny stocks well, than it is to skim the surface of 125. In short, the best investors own fewer stocks.
“Buy low sell high” may be a fun cliché that garners laugh tracks on The Flintstones, but it won’t help you when you’re in the trenches. A better maxim that might get you further ahead is “pay attention to price, be patient and focus.” It may not rhyme, but it works.
Successful penny stock investing may appear simple but it’s not.