GUAPO'S "HOW TO TRADE THE PENNIES", PART 2

Second installment of wisdom and wit from my friend Guapo:

2. The Nature of The Penny Stock Market

First let me tell you that neither I nor anyone else that doesn’t have inside information is an expert in the markets. Some folks are better in the markets than others of course.

Almost everybody on the boards refers to themselves and other folks as investors but in reality, anybody playing the penny markets is speculating at best, outright gambling most of the time and frequently simply rolling the dice on a one-shot grab at the gold ring.

It’s a little better with stocks on the OTCBB than the pinks, but both are very risky, because OTCBB stocks and even less so the pinks, aren’t required to file much information.

It is accurate to say there’s no chance of getting rich off blue chips, not on one roll of the dice. The stocks are too pricey and seldom move much. Penny stocks have therefore always been a haven for folks wanting to hit it rich on a small investment and con men, taking advantage of people’s greed.

It’s true that for a comparatively small amount of cash, you can conceivably hit the big time and make several million dollars off a penny stock. There is that chance but it’s so infinitesimal, it’s about the same as hitting a lottery.

Little investors like us in the penny market are minnows swimming with sharks. The game is rigged against us, in favor of the big boys. The stock market, not just the pennies, has always benefited the privileged. I don’t expect that to change since the big boys own all the brokerage firms and are members on the SEC board of directors and have the connections with high-powered federal employees and elected officials.

There are always con men and hustlers in the penny markets. Many are running companies. An investor buying into a con or scam has almost no chance of making any money if he’s holding for long-term appreciation. In fact the odds are extremely high he will lose a large part or all of his investment.

Very few penny companies ever become successful and make any money, even the legitimate ones. It’s a tough world out there with stiff competition. Holding long-term on straight companies then is also almost always a losing proposition.

You have no friends in the penny markets. The companies were started by individuals to make money for themselves, not those folks buying the company’s stock. When it comes down to a company owner making a decision to put cash either in his pocket or his stockholders’ pockets, you can guess which way he will decide. Don’t ever expect a company to sacrifice its own best interests in favor of its stockholders. It doesn’t happen.

Company owners, officials, PR and IR guys, other organizations such as PR firms and consultant agencies working for the company, investment newsletters and people on the penny chat sites, including some of those running chat sites will lie to you, again and again if you buy their hype.

Company PR~s are often full of hype and grandiose language, predicting magnificent developments, just around the corner for the firm. I call it weasel talk from Scott Adam’s book Dilbert and the Way of the Weasel and the book by Paul Wasserman and Don Hausrath, Weasel Words: The Dictionary of American Doublespeak.

Weasel talk allows companies and their cohorts to distort the truth in an effort to pump the stock’s PPS. The language is sufficiently vague that the company can’t be legally held to what they appear to say. Remember too that every PR has the safe haven statement at the bottom, plainly stating that everything above it may not happen. It’s a caveat emptor warning.

Some penny companies, often times more than you would suspect, are nothing more than pump and dump schemes. The problem with pump and dump schemes is that often no one can tell for sure until the scam has run its course. It’s too late then for investors holding the stock when it collapses.

The typical tactic of pump and dumps is to hype the stock for as long as they can. Then when the grandiose PR~s, ads and appearances by the CEO~s fail to further generate any interest, the PPS is allowed to drop very low. The company then pulls a reverse split, always with a symbol change and sometimes with a change in company name and business plan. Then the pump and dump starts again.

There are people on the penny chat sites that have their own axes to grind. There are groups of people too, working in concert to hype stocks. I suspect but I can’t prove of course that a lot of these people are paid hypers.

Penny stocks can and are manipulated by the MM~s, and other people of influence, with the big bucks and power to do so. MM~s have some leeway and have all the information in front of them about what a stock is doing, which way it’s moving, the number of buy and sell orders at what prices, etc. They got it all, so they can within limits manipulate a penny stock’s PPS. If you had all the information they have in front of you, making money in the pennies would be easy.

Ironically, if you play the penny market smart, you’ll probably never get rich, since when you got a nice profit, you’ll sell. Big rewards require big risks, as they say, like holding onto a penny stock for long term, hoping the company is honest, competent and competitive. Few penny companies however will ever deliver the pot of gold at the end of the rainbow.