Death of a Company

The Pink Sheets are often viewed as the birthplace of new companies, where concepts meet public capital in an intricate process of implementation. Often these companies are spawned into public life out of the shells of companies with broken pasts through a reverse merger process. Yet as in every circle of life, there must be death before there is life. In regards to the Pink Sheets, it should be viewed as an open gateway between the life and death of public companies. There are the dying companies that have no future (many that have fallen from the graces of the upper exchanges after being delisted), the stagnant companies unable to clear the pink sheet gravity and will eventually die just as the former, and finally the undervalued gems with futures that can eventually clear the lower exchanges obstacles.

Not all companies on the Pink Sheets are in a transitive state. Well-known companies like Nestle (NSRGY.pk) and Heineken (HINKY.pk) call the Pink Sheets their home for instance. Yet for the most part, and for most people, the Pink Sheets will always be that high-risk zone where the rules of the game starkly change. Like a stigmata, the “.pk” brands companies with the degrading mark of instability, volatility, and a general sense of futility.

As another rule of thumb for penny stock investors (PSI), it is wise to stay away altogether from delisted companies. Companies that have failed to retain their spots on the upper exchanges are the fallen angels of the investment community. They carry momentum of a dangerous kind, as their futures are vague or perishing and the need to raise capital likely lurks around the corner. A wise PSI will fish in “safer” waters by trying to find companies that are new to the market, and yet not new as a company. Stop watching companies that have come to the Pink Sheets to die. After all, resurrections are a rare occurrence.

Pink Sheet Gravity

For some time now I have been referring to a phenomenon known as Pink Sheet Gravity that only exists on the lower exchanges. Roughly defined, pink sheet gravity is the market force that pulls down the share prices of the public companies listed on the OTC:BB and the Pink Sheets. It is likely the cumulative effect of several conditions varying from dilution of the company stock, the social environment of the lower exchanges, and the mysterious (but commonly blamed scapegoat) naked shorting process .

Pink Sheet Gravity is the most influential operational distinction between the lower exchanges and the upper exchanges (NYSE, NASDAQ, AMEX, etc). From a historical standpoint, the stock market (upper exchanges) has maintained a steadily growing upward momentum over the long run. Were one to look at a comparable study at the lower exchanges, we would see a trend very much in the opposite direction.

It is for this reason that investing on the lower exchanges has always been an avoided practice. Like putting coins in the slot machines of several casinos, diversifying a portfolio on the lower exchanges leaves the odds of long-term success low in your favor. Yet with meticulous research, comprehension of the lower exchanges, and self-control, choosing the companies that can succeed in beating the house can be reduced to an informal “science”. Just as well-known poker players annually find their ways back to the final tournament table, a penny stock investor who knows the game is likewise able to overcome the Pink Sheet Gravity through the undervalued companies primed for take-off.

Diversification Overkill

The number one rule that every investor knows is to “diversify your portfolio.” It couldn’t make more common sense than if Mr. T himself were to jump out from around the corner and say it as it is. Diversifying one’s portfolio makes perfect sense as the only effective tool to soften the blow of losses in a dangerous market. Yet diversification can also serve as a Trojan horse when it comes to the pink sheets, where penny stock investors (PSI) come to apply the rules of the game they’ve learned from trading on the upper exchanges.

From a practical standpoint, it is wise to invest only a certain percentage of your portfolio into penny stocks (NEVER invest your entire portfolio into penny stocks). This is an intelligent form of diversification. Penny stocks must always be considered speculative, and it is wise to dip your hands across the risk spectrum for a balanced portfolio fit for you. However for the fool who ignores this advice, diversification entirely on the lower exchanges will NOT mitigate your losses more so than investing into a few companies.

For the unfortunate fool who finds himself heavily invested in penny stocks, diversification results in a capturing of the lower exchange market as a whole. Yet unlike the upper exchanges, we have already established that the lower exchanges are hindered by the pink sheet gravity. Diversification on the lower exchanges results in the downward momentum of your portfolio.

Proper commitment to the procedure of research and confirmation will give way to proving that some lower exchange companies stand high above the rest in regards to their inherent value to the industry. Out of the amount you’ve set aside for penny stocks, invest heavily in these companies at the ideal times.

As a rule of thumb, whenever possible, aim to try to own at least 1/10,000^th of the company’s outstanding common stock. Depending on how wealthy you are, this fraction can vary accordingly. When considering that decent money on the upper exchanges will tend to buy you a fraction in the 1/100,000^th to 1/1,000000^th range, it is wise to exploit the advantage of the lower exchange market – low market capitalizations. If you find that your investments in your portfolio are nowhere near accomplishing this fraction, consider tightening the amount of companies you’re invested in.

The Funky Friday Rundown (8/10/2007)

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

1) Phoenix Associates Land Syndicate (PBLS) -- As of right now 3:25am, I’d say that the 1^st round of anxious profit-taking is done and the second round of accumulation is coming around. HUGE contract, pay attention to this company.

2) Panamersa Corporation (PNMS) – CEO Mike Terell left, or did he? Personally it seems like his “departure” would mean he’s more committed to the company by getting further involved… and that kind of devotion is a good thing in my books.

3) Deep Down, Inc. (DPDW) -- Oil’s expanding out to shore in the long run, and the price is only going up. This company’s got a likely future, but no comment on the short-run.

4) Franchise Capital Corp (FCCN) – Never been into auto parts myself, but there’s something to be said about the attention Aero’s been getting. I’m curious how profitable they can be.

5) Renewable Energy Resources, Inc (RENW) – Still seeing a lot more pain before the gain. I like the potential though. Huge jump for those who caught the bottom, but I got a feeling it won’t be the last time we see it there.

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):