Thursday, March 30, 2006

Add Some Sizzle to Your Portfolio

With every risk comes the potential of great gain. Yeah, yeah - the same can be said of great pain. Risk is good, but managed risk is even excellent. In the world of 7-8% average annual returns, investors always look for the multiple bagger. One to ten baggers i.e. 100 - 1000% gains. Most of these multiple baggers, are often as a result of great risks - while others are simply as a result of positive surprises (i.e. takeovers, earnings news, addition to an investable index, mergers or even rumors of them). The third reason for a multiple bagger can be a very good knowledge of how Wall Street operates (this I will touch on in my next posting) . It is usually a bad idea to speculate on positive surprises, but taking some managed risk should be considered.

Wall Street is a casino, no one makes money by betting against the house. Do you realize how much Wall street rakes in for just exchanging your money hands over fist? Heck, but you too can make some money by speculating in a very smart way. This smart way is what I call Below Radar Penny Stock Investing . Penny stocks are generally stocks below $2 in absolute pricing. One caveat, your speculative position for any given portfolio must not and should not exceed 20%. Remember, the bottom can fall off anytime- if you get slaughtered due to your greed, remember you are a sinner!

Penny investment is risky. First the downside: Mutual funds can't generally buy stocks below $2. This means the easy money cannot be made by you and I - when fund managers turn positive or negative on such stocks. This also means that their volumes are usually negligible and we can easily bid them up unnecessarily. Remember, the fact that they penny stocks also mostly means they are expensive. That is counter-intuitive but it is true. The relative cheapness of a stock is measured in its Price per Earning (PE) multiple not its pricing. However, no stock gets to $2 because it is making money. Since most stock often enter the stock market at the average price of $12 or above, that means they are at $2 for a reason- losing money! This means an over bloated PE multiple or even a negative one for that matter.

The Upside: They can make you a lot of money if they go up. Simply put, assuming you bought a penny stock at $1.50, you can afford to have more of that unit. Meaning, you can easily buy 1000 shares of Firm X and become a sure fire part owner. Often times, penny stocks usually increase in price on unusual days when idle money is seeking bargains - that is a sure opportunity for this our penny stock X to move up to $2.25 - that is a monstrous gain my friend. You just had a winner! A sure 50% overnight gain. But imagine this...Next day, Mutual Fund B manager runs his screen and suddenly stock X is above $2- you know what? He buys more! And what next, limited volume equals increasing price acceleration (Econs 101), this means he buys more and his Fund Y can't be beaten he too buys more- end of day 2 you Stock X is at $3 - that is a 1 bagger. The end to this can be seen, this stock can easily hit $5-6 in one month. And then, if I were you I will take half off the table. Trade your gains, don't be a pig!

The scenario painted above has been tested by yours truly and I can testify. NSU and TGB are the stocks. Well run mining companies, dealing in Gold and Copper. In the world of mineral mining and the present bull market in materials I found them the best speculative stocks around because of CRIB (China, Russia, India and Brazil) . CRIB needs materials to build dis and dat and NSU and TGB has the stock that can make me some money. I put them in my Fantasy portfolio 3 weeks ago, now they both rank 2nd and 3rd after the other monster on there (FMD- of fallen angel fame). Indeed, no one makes money panicking and if you don't have stomach for ups and down please stay out of speculation.

To select penny stocks to speculate with ensure that they:
1. Belong to a sector that currently in favor e.g. materials, mining
2. Have good management that understands PR in place . Eew! NSU knows what am talking!
3. Have balance sheet that is healthy- check their debts and if they have enough money in hand to pay off in case the environment becomes unfavorable.
4. Check for their take over viability.
5. Company is not in the cross hairs of any analyst. Make sure it is not being covered by anyone on Wall Crackers!

If you keep these rules in mine- then you are on your way to the House of Pleasure!

P.S. The unusual penny stock Article- How to make money on un-speculative speculation

No comments: