This article has been provoked by a reader who told me he wasn't interested in my site because it is weighted towards penny stocks which he considers as being suitable only for gamblers. The purpose of this article is to sweep away misconceptions and to make crystal clear the enormous advantage of intelligent penny stock investing over normal respectable investing in higher priced stocks.
In the first place investing or speculating in the stockmarket is an opportunity cost game, the objective of which is, or should be, to make the biggest gains possible in the shortest space of time. From this simple truth it is obvious that an investor who buys the stock of a large well established company has generally already goofed up big time. He is already a bagholder arriving late at the party who is paying a high price for something that may have been a 20 cent stock a few years ago. This kind of investor thinks that he is doing well if he makes a 30% gain in a year. 30% is NOTHING compared to what he could have made elsewhere. So why do most investors insist on shooting themselves in the foot by buying such mediocre investments? Essentially there are 2 reasons. One is fear - while most buyers of stocks are goaded on by the prospect of capital gains they are also terrified at the prospect of losing their capital, and are therefore inclined to invest in larger established companies because they figure they have much less chance of going bust, also they feel more comfortable being part of the crowd investing in these companies - the old safety in numbers thing. The second reason is INFORMATION - the vast majority of investors are very low in the pecking order when it comes to receiving intelligence about companies and stocks that is accurate, actionable and timely. If you have ever sat on a bench in a park and watched a flock of pigeons feeding on bread or seeds that have just been thrown down you will know what I am talking about - Big Money is like the large bully boy birds at the center of the scrum - really going at it and getting their fill. The average investor is like the forlorn birds more towards the periphery - walking around in circles and nodding their heads about in a vaguely ludicrous manner, and ending up with mere crumbs. Big Money is the first to get accurate, high quality, actionable information and thus nearly always wins, leaving the average Joe to scavenge around for clues and usually buying stocks on the basis of old stale already discounted information that he has picked up in the mainstream financial press, which serves as a distribution mechanism for Big Money, or from Email tips that have gone viral. Small wonder that the majority of investors are toward the bottom of the food chain.
Having identified the 2 prime factors that sabotage most investors' hopes and realistic chances of ever making any serious money in the markets, what can you do to move yourself from bagholder victim status to joining the ranks of the Smart Money investing elites who dine in style and routinely suck up all of the hard earned capital of their less informed and dull-witted brethren who repeatedly offer themselves up for sacrifice. The first thing you have to do is drop the idea that big is good and that there is safety in numbers. If you think that you are safe from loss because you buy the stock of a big company you are sadly mistaken. If you are from Missouri or are otherwise not wholly convinced that this is so, a glance at the chart of AIG ought to be sufficient to bring you into line.
Like another example? - try looking at the 3-year chart for General Motors.
Alright, now that we have established that buying the stock of large companies is no guarantee of protection, let's deal with the information issue. But first we will address the assertion by the critic that penny stocks are only for gamblers. In the first place, all of life is a gamble really - none of us are going to get out of it alive. You've all heard the old saying nothing ventured, nothing gained. This is very true as is the motto of the British Special Air Services, which is Who dares wins, although what their recruiting seargents don't make a great play of is that who dares can also end up very dead. So what we have to do is to strike a balance between being sufficiently bold that we can make good progress, without being foolhardy to the point that we stand a high chance of being wiped out. We have already made clear that investing in large stocks is generally a waste of time - even if they do go up the gearing simply isn't there, because of the high entry price. Therefore such stocks are only suitable for dullards, who can never aspire to the massive gains that we do. The key point to make regarding penny stocks is that the assertion that they are only for gamblers is only true for those who lack the requisite accurate, high quality, actionable information. At www.clivemaund.com we aim to procure this information before we invest in penny stocks, either in the form of the correct assessment of the technical condition of stocks, especially with regard to accumulation of stocks as determined by the correct analysis of volume patterns, or by no-nonsense boots on the ground assessment of companies' financials and prospects.
In the case of Kent Exploration we blew the cover of Smart Money who had been accumulating the stock for months and our first recommendation actually kicked off what should prove to be a major bullmarket in this stock. In this case the assessment was purely technical - no company visit, no assessment of financials or the companies' prospects, but as you can see the interpretation proved to be correct.
In the case of Samex Mining, the first recommendation which kicked off the major bullmarket in this stock was based partly on the correct assessment of the stock's technical condition - subtle but definite accumulation had been detected in the volume pattern during the month prior to the upside breakout, but also on the excellent potential of the companies' properties determined on a visit to the Los Zorros goldfield. The second recommendation was made some weeks later due to the stock's impressive technical performance coupled with increasing knowledge of the companies' fundamental situation on the ground. The third recommendation was made following a joint visit to the companies' prospects in northern Chile with senior gold geologist Nigel Maund, which this time included the companies' astonishing Chimberos prospect. Now you might say, looking at the chart for Samex shown above It`s gone up a lot in a short space of time - it's very overbought, it might react. True it has gone up a lot, and it might react, but the writer KNOWS that there is every indication and a high probability that the company is sat on a massive copper-gold deposit on its Chimberos prospect of similar magnitude to Freeport McMoran's humongous Candelaria open pit copper mine south of Copiapo, which is one of the biggest open pit copper mines in the world. While it is a fact that Samex will probably have to share the pie with the Chilean company that is doing extensive drilling nearby, this is ONE VERY BIG PIE that we are talking about here, and we shouldn't forget Samex' large 100% owned Los Zorros goldfield south of Copiapo, which is considerably closer to Freeport's giant mine and has 3 major targets that could also yield massive deposits, which will be the subject of a forthcoming special report by Nigel Maund. So you can go ahead and sell Samex stock if you own it, on the grounds that it's short-term overbought, but you should bear in mind that if a major deposit is confirmed at Chimberos of the magnitude that looks probable, you could be looking at a $30 stock here - so you are going to have to ask yourself the question as to where you get back in, especially if it doesn't react back at all and just carries on up. If you think that the writer is entering the realms of fantasy here, take a look at how some examples of this type of stock performed in the late 70's on the following table, bearing in mind that the environment and outlook for gold are much better now than they were even then, and you will realize that I am actually being rather conservative in calling for a possible $30 price for this stock.
So what's it to be? - are you going to remain in the dull, grey world of the plodder, the also ran, aspiring to 30% gains in a good year, or are going to move to where the action is, and join us at www.clivemaund.com where we plan on celebrating gold's accelerating bullmarket in style.