Research and Confirmation

As two sides of the same coin, the practices of research and confirmation are two reliable techniques to sound penny stock investing. Without them, you are flying high above the Atlantic without lights or radar. For down here in the lower exchanges, nothing can be taken at face value. Here you will find dirty stories that sound like fiction… and sometimes they might just be that. Then there are also those instances in which you might hear little at all, and left to fill in the dots. The lack of transparency requirements and big brother watching over the shoulder of each company often results in a lesser degree of obligation to the shareholder when compared to companies on the upper exchanges. Such freedom on the company’s part leads to exploitation to some or lack of regard by others.

On the lower exchanges, every good shareholder must attempt to piece together a story that exists beyond the Press Releases. The story involves how the company has come together, what its current purpose is, and what its direction is. More importantly, it is critical to establish why it is you believe that this story is validated. External confirmation is the more supportive evidence towards a successful story. Whether this be in the form of contracts formed with other companies or a guy driving past a factory to confirm its operational, external confirmation is the glue that binds the story together.

As a reminder, it is important to remember that external confirmation by itself will typically never validate the entire story but a specific part of it. There will always be judgment call needed into believing any story. If you are not actively looking into the story of a company alongside reading the PR’s, you are setting yourself up for a more dangerous situation by numbing your investing senses.

Patience is a Virtue

“Patience is a virtue...”

The old slogan is beaded with wisdom when contrasting the trader to the investor. Patience is the defining factor that distinguishes between the two. It is the missing element that weighs a sizeable return upon the company’s progress rather than the sentiment of those following it. Above all, it is the most elusive characteristic of the penny stock investor (PSI).

What patience means:

• Patience means avoiding to execute trades on volatility.

• Patience means retaining a likely futuristic outlook of the company.

• Patience means enduring non-crimpling obstacles to the company.

What patience does not mean:

• Patience does not mean blindly holding onto a currently overvalued stock.

• Patience does not mean reacting to rumors before proof.

• Patience does not mean justifying a progress-crimpling obstacle as a non-event.

The Story Beyond the Press Release

I recently watched a documentary about North Korea. It dwelled upon the puppet population that today has found itself brainwashed and strictly controlled by the military state. In a nationwide effort to save face to the world, those in control have made several efforts to deceive and protect their nation’s image through elaborate facades. Some of these ranged from the existence of fake cities along the 38^th parallel to the building of 40-story high-rises that in reality service fewer than a hundred people. Overall the documentary clearly portrayed an example of a dominant back story that operated contrary to the advertised public story.

In the same sense, investing in penny stocks will sometimes carry a similar model in which a back story (the non-publicized events/progress) will dictate the direction of the share price over the influence of the public story (ie. Press Releases, Conference calls, etc). Most of the time, such instances of this model are scams and deceptive companies that adversely hurt the shareholder. Such companies are the ‘North Koreas’ of the lower exchanges and are so rampant amongst the Pink Sheets that they tarnish the image of trading of penny stocks.

But every now and then… there are the odd outliers that serve as counter examples to the common trend. For these companies, the public typically knows very little of what’s going on as the company fails to press release its success for some reason or the other. Such companies are risks to take in themselves. Despite their positive trends, it is always a good idea to have full comprehension of what it is that is going on with the company and what it is that is driving the share price. Unless you are privy to such inner knowledge, it will always be advisable from this investor to stay away from such companies. Whereas it may seem profitable to follow the crowd, it only takes the one back story event unknown to yourself to leave you hanging dry as the upward trend collapses drastically. Get to know the story, or stay out.

Here are two examples of these oddities that have broken the stagnant trend of the lower exchanges in an unexplained upward trend. (OCTL is a research company that has very odd movement relative to the moderately successful news released to the public, and SRFDF is a major mining operation that has released very little information to justify the multi-bagger it has already become):

Trigger-Happy Jack

When the rubber hits the road, only the execution of the trade will matter when investing in penny stocks. Throw away all the research, the luck, the confirmation, and the whole shebang. If you don’t buy in at the right time or sell when the harvest is plentiful, you’re setting yourself up for a painful experience. Particularly noticeable in the pink land of the lower exchanges, entry and exit points require both a form of patience and resolve for the best possible outcome.

Penny stocks are inherently cheap. Yet ironically they typically trade on the same interval scale as those of the upper exchanges. Investors hate to trade on subpenny intervals (ie. $0.1234) when they’re not coerced to do so (they are forced to do so when a stock drops below a penny). Unfortunately, this also adds to the volatility of the trades. For example, an 8-cent stock will typically jump on a 12.5% gain or loss on a single tick.

Because of this, following a company’s trading patterns is a vital part of investing on the lower exchanges.

Does the company have low volume?

Is the company trading sideways or does it sink and rise regularly?

How does the stock react to certain news?

We’ll go into more of this another day, but in the mean time it is always useful to get a firm understanding of how people react in various market situations. I say this because down here on the lower exchanges, your peers are typically the ones that are able to fluctuate the share price. Here are just two noticeable trends to bear in mind when it comes to executing the trade:

1) People like to trade heavily in the morning on news -- It’s very common to have morning spikes on the release of news. If you miss the spike, but feel the trend will continue, have a little patience as the price will typically retract a bit within an hour as people profit-take or panic a little less after coming to their senses

2) If a deadline approaches, a trend will not continue up to that deadline – If a company is undervalued, do not expect it to obtain a representation of its expected value prior to hitting a deadline. Even while there is momentum, this will typically cut short a few days prior to the deadline and begin to trade sideways or sink.

The Funky Friday Rundown (8/3/2007)

(Note: Every Friday [I do not post on Saturday or Sunday], I am going to do a one-line commentary about the past week on some of the more popular penny stocks listed on Investors Hub. These are NOT recommendations... just some thoughts. )



1) West Point Capital Inc (WPNC) -- Potentially turned-sinner? I like the management, concept, and share structure. Undervalued on future value, but can the company truly meet its "financial guidance?"

2) Ifinix Corporation (INXR) -- This one still remains way too hazy to be a solid investment... get a brokerage signed on & then we'll see.

3) Panamersa Corporation (PNMS) -- No significant news in a long time leaves unhappy investors, but there has been a consistent trend of sideways trading... dare to look beneath the skin on this one? You either believe it or you don't. Win big or lose it all.

4) Phoenix Associates Land Syndicate (PBLS) -- Looking higher within a few weeks. The company's building a vertically-integrated empire, but is it coming at the costly expense of shareholders (dilution)? UPDATE (1pm): "The BIG news was released today! GO BUY at these undervalued prices! TA being ungagged, showing the company's opening up as well!"

5) Xechem International, Inc. (XKEM) -- Possible long term success, but we won't be seeing this take off anytime soon. Lets look back in a year.





Leave a comment on a stock you want watched.

Dodging the Head-Fake

There’s nothing like a good game of pick-up basketball with some friends on the local courts to feel great throughout the rest of the day. That is… unless you look like a fool on the courts. Sometimes, all it takes is a simple head-fake to mean the game as it catches you off-guard, committed, and vulnerable to the offensive attack.

In many ways, the Penny Stock Investor (PSI) will also find himself in such situations as shady companies throw head-fakes through their misleading press campaigns. Often this can lead to a game-over scenario by the time investors catch wind that something fishy is going down. Some companies will promise high quarterly growth rates and others will introduce promising technologies and markets. In each case, the goal of the company is to lead the investor into believing that the best time to invest in the company was yesterday. Inevitably, there is enough half-truth existent on the Pink Sheets to keep both the optimist and pessimist satisfied customers on the hopes of promising futures.

Learning to read a head-fake takes practice, but a practical step towards avoiding one can be as simple as finding safer investments that are easier to be confirmed externally. Some suggestions for “safer” investments:

1) Avoid the finance companies – bank loans, mortgages, credits, etc. If the company only deals with numbers (and lacks a hard manufacturing product), it is also more difficult to confirm the truth of the company words.

2) Selectively avoid the high-tech’s – Unlike the finances, the high-tech’s (companies that offer amazing technologies that can change their industries) are only to be avoided if they are unable to produce revenue within a short period of time (less than a year). If they’re still developmental, gaining acceptance and clearing regulations are road-blocks that hinder and handicap the company as a viable immediate investment.

3) Avoid the under-financed companies – Companies that will require larger expenses in the future will require larger cash flows if the initial financing is not in place. While this is typically difficult to discern, there is some good-judgment to be made regarding an expense model outlook. Under-financed companies will resort to diluting their stock when the need for cash arises.

4) Avoid the start-up company – Simple as that. Too much pain straight off the bat, way too little gain for a long time coming.

Trust in a Trust-free Zone

The typical (Penny Stock Investor) PSI is a lone wolf. He hunts alone, and is forced to survive on his own… (and is sometimes pushed to defend his dignity from the wife critiquing over his shoulder).

With the invention of the internet, a new battlefield dynamic has emerged to the aid and woe of the investor. Internet forums have become a modern phenomenon as a channel of interlocution between PSI’s. Suddenly the PSI is thrown into a social world, allowed to operate amongst like-minded lone wolves in a pack mentality. He becomes a soldier for a common cause, but trapped behind the necessary cliché of “always looking out for number one.”

Knowing who to trust is the key to a successful team. But in this world, there is never a means of truly knowing who to trust. Ultimately, it comes down to a weeding process of skimming the more loyal and dependable from the selfish, opinionated, and non-contributing majority.

Suggestions to effective weeding:

1) Ignore all company bashers – Even if they’re right about the company, a person who takes a negative stance against the company will never add to the insight that another person you can trust or yourself could easily contribute.

2) Take note of people who take time to write their entries – A person committed to knowing more about the company will often take time to write longer entries in order to be heard (this is not to say ignore those who don’t).

3) Take note of people who actively research – Has this person made a call that others hadn’t? Has this person taken a search a step farther than you? Watch the actions of these people.

4) Cautiously ignore people who overreact and/or flip stances – People who allow their sentiment to get the best of them will often be more dangerous to the cause in the long-run than they will be useful. Be careful with such people, but mindful of their good input.

5) Throw a bone – When possible, single out those you’ve been watching & privately throw them a bone to see if you can establish a closer network.

Some Popular Internet Forums dedicated to Penny Stocks:

InvestorsHub (Personally, this is the only forum I find to be the most useful.)
Investor Village
Silicon Investor
Raging Bull
Hot Stock Market