Blog : 3 Biggest Penny Stock Lessons

by Peter Leeds on January 7th, 2015

This is mandatory reading for anyone using penny stocks to build their fortune.

It may seem simple. Well... it is, and almost depressingly so. In a way, I'm trying to put myself out of business with this information.

First a quick pre-amble. When I was 3 years old, for Christmas I asked for an office desk. When I was 10, I bought junk food with my allowance, then sold it a few days later to my older sisters for 3 times the price. I bought an $18 brick of 200 fireworks, then opened the pack and sold each Cherry Bomb for 25 cents for a total of $50. In fact, I skipped class in University to start up my business.

Long story short, I have always understood how a company needs to operate. The combination of penny stock investing and knowing business has been a perfect match for me. And that has been key to the success I have enjoyed in the stock market.

(By the way, we just uploaded our latest video about the American Dollar fading, and what it means for you!)

And that leads us to our 3 big lessons to make profits from penny stocks:

1) Don't Over-Think or Over-Complicate

Stocks represent shares of a company. When that business does well, the shares typically increase in price. The end.

Invest in great businesses, and profit as they grow. What makes a great business? This does:

growing market share
up-and-coming industry
high customer loyalty (low turnover of clients, frequent and increasing follow-on orders)
high barriers to entry (to stave off new competitors)
a powerful, recognized brand
increasing revenues
decreasing expenses
broad client base
low debt
high profit margins (for every $1 in sales, they take at least 20 cents as profit)
well funded to maintain operations for years

And of course, look for a top management team which has demonstrated success in their previous careers (people typically tend to keep doing what they've always done).

Now, if you're saying, "obviously" or "of course Peter, thanks for wasting my time," then you are right on track. It really isn't very complicated, and the sad fact of the matter is that NO ONE does what is required. Most people would rather take a diet pill than go to the gym.

All of the information required is freely available online, or straight from the company themselves. Now, if a massive company like IBM passes this analysis test, it will probably do well. But if you find some obscure penny stock just before it has it's moment in the sun, you could be looking at massive, rapid gains, which just keep growing for the next 10 years!

2) Survive Volatility and Risk, then Ride Massive Penny Stock Upside

Anyone who tells you that penny stocks are not risky is a crack-pot. However, most people who lose on low-priced shares had a lottery ticket approach, or were hoping to turn $100 into $20,000 overnight. This resulted in them tossing money into speculative things like Bitcoin, Pot Stocks, or some penny stock who says they 'hope to cure cancer.'

There is no shortage of stories with "massive potential," but there is a drought of penny stocks which are are actually building a business. By paying attention to the first point above, and putting in the work required, you will dramatically improve your results. However, you can't always anticipate sudden downside which could come from a lawsuit, or loss of a client, or even a factory accident.

This is why it is so important to limit your losses. Any time a penny stock starts moving against you, take your losses early and move on to a better investment. Think of it like ripping a band-aid off in one motion.

By limiting all your mistakes to 10% losses (for example), you will never feel the effects. However, the penny stock trades which do work out will make you a lot more than 10%!

Let your winners run!

3) Avoid the Crowd

Penny stocks are so thinly traded that even a small amount of buying can drive the prices much higher. Unfortunately, this typically puts them above fair value, and the crowd over-pays for the shares... even in the quality companies.

If your Grandma is talking about a stock you should buy, or the Taxi driver has a hot penny stock tip, it is guaranteed losing proposition. The huge gains are made when you buy into a great company that no one has heard about, just before everyone hears about it. Think buying a "household name" right before anyone knows about it.

And we're not talking about those nickle and dime 15% gains - more like 250% or more. You only need to find 2 of those in your life, and you'll be sitting pretty.

To summarize, keep it simple, limit your risk, and avoid the crowd. These are the 3 big lessons I can give you from several decades of penny stock investing. And you have the advantage, because you don't need to take twenty years to learn them - you just got it in 7 minutes.

As of January 2017 we no longer publish the blog and it has been removed from the webiste menu.

You are reading this old blog entry because we still like to reference it. :-)

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