TheGreenBaron.com - Investor Strategies - Part Three
Eeny, Meeny, Miny, Moe:
If you decide not to decide you’ve still made a decision…
A jack of all trades (pun intended) is often a master on none. Before you decide on any stock to invest in, we suggest you first decide which types of stocks you’re going to invest in and focus on, whether it’s a certain sector, price range, exchange, industry, etc.
Many investors make the mistake of investing their money in whatever happens to be the latest "hot industry" at the time – and that’s not always a bad thing. “Hot industries” often produce hot stocks – if they’re the right “hot stock” at the right time…for you.
The problem with that method is “what’s hot” today soon becomes “what’s not” tomorrow – perhaps even before you arrive on the scene. By then the sector may already be over-crowded, over-sold, over-matured, and usually over-priced. The next thing you know (usually too late) is the change from current fad to former fad usually results in the shares of all the penny stocks in that “hot” sector having already begun (or fully achieved) their inevitable retreat and sometimes complete collapse – usually rapidly and significantly while taking those investors (and their money) along with them on the way down.
Here’s a better plan than buying what’s “hot” – try buying what you know instead. AKA stay in your lane or area of expertise, experience and/or knowledge. For instance; If your background is in sales or marketing, you will have an advantage when trading stocks in the sales and marketing sector. If your background and experience is in the Internet or technology sectors, then your advantage regarding knowledge and experience will be in those sectors or companies as well. That’s called, “taking advantage of your advantage.”
Bad News That is True is Always Better Than Good News That is False:
“Good news that was false” got General Custer and the 7th Calvary wiped out in a few hours – “Bad news that was true” would have saved their lives. Every company and stock has issues and factors that are both positive and negative. The key is to identify both the “positive” AND “negative” aspects, issues and factors for any stock you trade before you trade it – not after you find yourself trapped at “The Little Big Horn”.
An effective method to determine which stocks are “good” and have the most likely chance of increasing in value after you buy them is to make a simple list of “Why should this particular stock go up?” – and make another list of possible, if not probable reasons why it will not go up, or even worse, go down in value after you purchase it. Then compare the two lists. This is also commonly referred to as a “Ben Franklin Balance Sheet” named after its inventor Benjamin Franklin. He found the best system to assist in making important decisions was to compile a written list of all the “positive” and “negative” aspects and/or results of your decision either way. Not deciding is still deciding…but you’ll make the right decisions more often than not when you have all the available facts in front of you to compare against.
If you don’t know where you’re stock is going – how will you know if and/or when it gets there?
THE TOP 5 REASONS WHY THIS STOCK SHOULD GO UP?
THE TOP 5 REASONS WHY THIS STOCK SHOULD NOT GO UP?
Now what does your “Balance Sheet” say about this stock? Up or down?
Trade Your Passion…For Money:
As the old saying goes, “if you do what you love, you’ll never work a day in your life.” The same holds true with investing; what is your passion? If you hate or know nothing about technology (join the club) then eventually you will learn to feel the same way about investments in those sectors and soon afterwards you’ll lose your “passion” not just for those sectors but for investing in them as well – and sometimes along with your money. Investing should be fun and of course profitable – but if it takes a while for the “profit” part to show up, at least in the mean time you’ll enjoy gaining the experience and skill – not to mention possibly learning a new and profitable trade (pun intended) that lasts the rest of your life. A good way to identify where your passions lie is to check which magazines you subscribe to, which hobbies you have, which sports you follow or participate in, and even which type of products or services you migrate towards in your personal life and professional life.
Typically people overlook their own industry, and instead focus more on the financial aspect of their investing. In doing so, they give up a major pre-established advantage that they didn't even know they already have. Remember what we discussed above about, “taking advantage of your advantage.”
One Egg Per Basket Please: Divide and conquer…
When it comes to investing, the old adage, “Never put all your eggs in one basket” – or in this case, all of your money into one stock is absolutely correct. Anyone even remotely familiar with investing, even if they never personally traded a single stock in their entire life, has heard the term “Diversification” – which is basically spreading around (diversifying) your potential for risk and/or loss. Example; if you have all of your investing capital in only one stock your risk of gain may be 100% - but so is your risk of loss – and a 100% loss risk potential is no way to trade any stock, especially Penny Stocks. “Diversification” is a safe and proven wealth protection strategy – so is keeping a certain percentage of your overall investment capital in “cash reserves”.
Another Delay? What’s Up?:
There are more reasons than can be listed here why companies, especially often under-funded and/or start-up Penny Stock companies experience delays (or sometimes “nevers”) when it comes to meeting deadlines set in their public announcements – referred to as “Forward Looking Statements/Projections”. Here are a few of the more common and more significant “red flags” to watch out for when it comes to companies falling behind on (or missing altogether) their stated objectives that could and more often than not do have a significant and negative impact on share value as well as investor sentiment and support over the short or even long term. If there are any delays in a company’s future projections, especially the ones listed below, we consider them a major “red flag” warning indicator that should not be ignored as well as carefully monitored since it may affect your buy/sell/hold decisions.
 Corporate issues – AKA “House Keeping”: One of the more common and recurring “House Keeping” issues public companies deal with is staying current with their corporate filings. Doing so requires some extra work and added expense by the company. However, that little “extra work” and “added expense” is minimal (but can have a major impact) compared to a company’s other expenses, duties and budgetary items. If a company doesn’t have or is not willing to invest a relatively small amount of their operating capital to “stay current” in their filings then what are the chances that company will successfully complete bigger and/or more expensive “Forward Looking” endeavors? Sometimes little things mean a lot.
 Construction or real estate development/acquisitions: From buying, renting, leasing, selling, developing to relocating any real estate “project” is a time consuming and usually costly expense and it usually requires direct participations and/or support from several entities both inside the company and outside third-parties to accomplish. Because of those factors (and several others) real estate related objectives can and almost always do involve time delays and additional expense beyond originally planned and/or announced by the company. With that said; in the Penny Stock world, any real estate project “delay” that extends beyond a reasonable time period for such a project is called, “The Cliff” – and if you’re a shareholder in that company the last place you want to be when you get to that cliff is in the car with Thelma and Louise. Likewise, we consider any real estate project, especially one being attempted by a Penny Stock company that misses its “publicly stated deadline” by a significant and/or abnormally extended time frame for such a project to be a major red flag and one to be considered when making investment decisions related to that particular company/stock.
 Third parties: Corporate mergers, acquisitions, Joint Venture Partnerships (JVP), etc.: When a public company has plans for any of those the first the “public” will hear about it will usually be via a public announcement by the companies of their “intent” regarding their plans, usually in the form of an initial “Letter of Intent” (LOI) between both parties describing the nature, terms and conditions regarding whatever they have planned for and/or with that “third party”. What you want to look for is dollar amounts and dates in that initial LOI announcement. More importantly, what impact (if any) it has on the short term share price – especially if the other “party” to the transaction happens to be public as well. Then you want to closely monitor the impact on share price over the short term when both companies make their intentions public. Because usually, especially with Penny Stocks, that “initial” announcement uptick in share price (if any) will probably be minimal and short-lived. Savvy traders know this and will play that “short-lived” spike in share value – while other shareholders hold and/or buy stock in either company eagerly anticipating that “big run” they expect to occur when the “intention” is finalized. When it comes to Penny Stocks, even by the time the first LOI is announced the deal is pretty much done and known so by the insiders and any increase in share value beyond the initial uptick may have already been calculated into the future share price.
 New product/service roll-out: This event alone can dramatically change the entire dynamic of a company as well as the share price trajectory, especially with Penny Stock companies – so this is something to absolutely watch for. It is one of the primary factors that cause share value increases, especially over the short term. Depending of course upon the nature, type, sector, etc., of the “new product/service”. Does it expand the company into another sector or industry? Is it a new direction for the company? How much is it projected to increase market awareness, profits, etc? Is it a “primary” or lesser product/service than the company is currently providing?
 Funding/Financing: “SHOW ME THE MONEY!” – But “showing” a company “the money” does not always lead to actually giving that company “the money”. Especially when it involves Penny Stock companies. For every one company that has actually received the funds - meaning in the bank, there are probably a dozen or so other companies that announce they’ve been “shown” the money but for whatever reason, it never arrives. Shareholders, like the company and money source themselves, should never count those chickens before the eggs hatch – because eggs are fragile and often break before being “hatched”. The same is even more true when it comes to any entity writing a big check to a small Penny Stock company. Rule of thumb: Watch the eggs – count the chickens.
 Matters involving share structure: This could include (but not limited to) the payout of dividends, amendments, a reduction/addition re; the authorized and/or outstanding share count, cancellation of certain shares and/or stock buy-backs, buy-outs, mergers, bankruptcy, etc., etc., etc., and of course the dreaded, “No CURRENT PLANS for a (R/S) Reverse Split…at this time”. Unfortunately as we all know, “Current Plans” can and often do change. If any company has “plans” to significantly and negatively alter their current share structure such as via Reverse Split – there will be at least a dozen individuals associated with the company and/or the action that know it is coming and some of those individuals may be shareholders “directly” associated with the higher echelon of the company in some form, although probably not in “writing” anywhere, and possibly, if not probably, large shareholders and small cap companies do their best to keep their “large shareholders” happy and “informed”. And when any “large” and “informed” shareholders do anything with their “large” amounts of stock, like try to sell it, it usually has a significant impact on the share price when they’re on the move…especially out. Consider this scenario akin to being in a building and you suddenly smell smoke – what do you do? Maybe the same as those large in-the-know shareholders are going to do once they smell smoke coming from their stock?
Volume, Volume and VOLUME:
Stock activity creates stock productivity.
Share price and share volume go hand in hand – up and down. To confirm this fact spend a little time trying to find a penny stock that dramatically increased in price without a corresponding increase in buying “volume” and/or try to find a stock that dramatically decreased in price without a corresponding increase in selling “volume”. Stocks without volume are like race cars without an engine. They may look fast, but they aren’t going anywhere – especially up in price. Volume is the key – and volume is what you look for. Volume identifies and confirms investor interest and “interest” creates “activity” and “activity” creates “productivity”.
When you encounter a stock with large daily volume the first step is to check the last three highest days of volume over the past 90 days or so and see if the price reacted accordingly (up and/or down) – if there was little of no share price movement on those large volume days, you’re probably looking at a race car with “no engine”. If however, the share price did react on those three large volume days, significantly enough for you to make a decent profit on the trade and the share price held long enough at the bottom and the top for you to successfully get in and out, then try to determine what the reason was for those volume spikes. Was it because of news released by the company? Or better yet, was it part of the stocks normal cyclical pattern? If there’s a “pattern” then there’s your chance to take advantage of that pattern and time your trades accordingly to catch the stock on its next cycle - buying at the bottom and selling at/near the top the next time the cycle comes around (if it does). No cycle is carved in stone and they do change and/or end, so do not buy the stock simply based on the fact it’s “time” for the stock to do its previous/normal cycle. Wait to confirm the cycle is about to repeat; even if it means waiting a little longer and paying a little more for the stock before jumping in.
If you do indeed find a stock that has a consistent and predictable cyclical movement pattern then you may have found an opportunity to make several trades on that particular stock over a period of time to earn “consistent and predictable” profits from it as well…over and over again. Keeping mind, no cycle lasts forever and they do change as time goes by - sometimes ending altogether – as all good things usually do.
Also keep in mind the main rule when it comes to stocks moving during periods of above average volume; increased buying volume will move a stock up and increased selling volume will move a stock down – so make sure you know what type of volume you’re actually seeing occur when you decide to buy and/or sell.
Never Try to Catch a Falling Knife:
Or in this case a “falling” stock. If you visit or even frequent Penny Stock related Internet message and chat forums the first thing you will probably encounter is certain participants posting information encouraging other participants/readers to take advantage of these “cheap shares” by purchasing stock at the “current” level. Well, not so fast. First, the “current” level may not be the future level and that “future level” can and often might be lower than the “current” level. Second, who would be the most likely to want (or publicly encourage) buying a stock when the majority of acting traders are selling? The most likely candidates are the one’s encouraging you to buy. Third, people lie, charts don’t. And on occasion Level 2 and trading activity and type tell the truth as well…if you know what to look for yourself instead of listening to others.
What makes stocks go up? More buying than selling. What makes stocks go down? More selling than buying. So, why is your “falling knife”…falling? Because there is “currently” more selling than buying. If that continues then those “cheap shares” you picked up today, may not be so “cheap” in the near future. Keep a close eye on L2 during such periods. Look at the number and size of the blocks of shares currently for sale on the ask. Then look at the number and size of the blocks to buy on the bid. Then compare the difference. If the number of shareholders trying to sell is a significantly higher number compared to the number of shareholders trying to buy (especially by a ratio of 60/40 or more) think of it as a game of tug of war – which side has the stronger and bigger team, and therefore most likely to win the contest? The center-line (current price) will either be pulled up or pushed down by the larger and stronger team. Level 2 can help you identify which team is “currently” bigger and stronger and what direction they’re pulling in. The stock’s chart will tell you when the game began and who has been winning more than losing – the “current” share price compared to days/weeks/months ago will confirm your chart findings. What do you see more of – a red line headed down or a green line headed up?
If a stock is headed down and the reasons for causing that are still present then it stands to reason the stock will continue its downward trajectory. If the chart indicates the stock has been steadily declining for some time now, then it stands to reason (as long as current sellers continue outnumbering current buyers) the stock will “continue” to keep doing what is has been doing for some time now. Your eyes, Level 2 and the stock’s chart will tell you those factors more accurately than a stranger on a message/chat forum pounding the table for you to load up before it’s too late! They probably mean for you to “load up” on the stock they are currently trying to sell.
K.I.S.S. – Keep It Simple and Small:
The best way to minimize risk when trading Penny Stocks unfortunately is to also minimize profits – or better yet, strike a balance between the two. We would recommend that anyone actively trading Penny Stocks, whether over the long or short term, accumulate and/or hold “smaller” blocks and positions than they normally would for larger (and more stable) cap stocks and exchanges. Trading in smaller blocks, let’s say no more than 10% of the “daily average volume” may “limit profits” and also “limit risk” but it also puts you in a better position for faster liquidity – which can be essential when dealing with particular Penny Stocks at particular times. Ideally, you’d like your holdings to be large enough to at least give you a realistic shot at a decent short term gain, but small enough so that if you had to you could liquidate your “entire” holdings in no more than 2 or 3 trade blocks or ideally in a single block trade and just as ideally within 1 or 2 trading sessions. Penny stocks have a habit, if not an actual pattern of taking a lot longer to go up than they do to come down, meaning you have more time to buy (which doesn’t mean you have to or should) but less time, on occasion a lot less time, to take the money and run…before other quicker investors do the same. A common and successful method is to take your entire trading account balance and divide it up into 5 equal amounts of investing blocks – use 4 to actively trade, trying not to own more than 3 stocks at a time, and keeping the fifth block in “reserve”. This way you have a stake in 3 stocks, the capital to invest in a fourth stock, and/or average down and/or bulk up, and the fifth block of capital in “reserve” for use when only absolutely needed. This way you are an active, well balanced and diversified Penny Stock trader while greatly limiting risk by only slightly lessening (fair trade off) the potential for profit.
Trading BUY The Numbers:
Here’s a hypothetical question and we’ll use the below dollar amounts and percentages as “general” examples; Let’s say you know of a stock that you believe is going to $10 per share and right now you can buy that stock for either $1 per share or $2 per share - your choice. So, what do you do? I bet 90% (if not 100%) of you answered, buy the stock at $1 per share - right? Maybe not? Let’s do the “numbers” before you “buy”. First, forget about the $10 per share target price. There are no guarantees when it comes to what price you will eventually sell a stock for – the only guarantee is what price you paid for the stock. So again, forget about the $10 per share target price. Second, regardless of whatever target price you believe (hope) the stock will go to, you would still probably choose to buy the stock at $1 per share as opposed to $2 per share – right? Again, maybe not? Here’s why – before you buy the stock at even $1 per share there is another number you must calculate into the above scenario and that number is 50 cents. Specifically, how many other shareholders own shares at 50 cents and how many shares do they own? You see, when buying any stock, you must view every other shareholder as your opponent in a fight. You fight your opponents when you buy the stock – you fight them while you own the stock and you fight them when you sell the stock. And if you still pay even $1 for the stock, every shareholder that bought that stock at 50 cents theoretically already has you outnumbered 2 to 1 before you even purchase your first share – and since every other shareholder in that stock is your opponent in this fight, some of those opponents start the fight with a 2 to 1 advantage before you even step into the ring – meaning, you are about to enter the fight with one arm tied behind your back so to speak. Your opponents at 50 cents can sell their shares at the same price that you do and make twice the profit that you make (outnumbered 2 to 1) and/or sell their shares at half the price that you sell at and still make the same amount of profit that you make (one arm tied behind your back). If you do not take the time and effort to calculate the number of shares held at lower prices by the other shareholders, then again, using our fight analogy, you are now entering the “fight” with not only one arm tied behind your back (buying a stock at $1 others only paid 50 cents for) but also blindfolded (not knowing how much stock was already bought at 50 cents). This is a scenario where you are already at a major disadvantage (perhaps even have already lost the fight) before it even starts. So, how do you keep yourself from losing a fight you’ve basically already lost due to a pre-established disadvantageous position? Don’t enter the ring in the first place is a strong consideration – and simply find another “ring” to fight in - and there are plenty of them out there. So, let me ask the 90% of you that said you would buy the stock at $1 – would you now change your answer? Quick tip using the above example; before you purchase any so-called $10 stock, even at a dollar, utilize trade data logs and price/volume charts to determine previous “buying volume” at 50 cents. Then see if you can identify any period after that where similar corresponding “sales volume” occurred. If there is none, or very little, then your “opponents” that bought at 50 cents possibly if not probably, still own their stock or at least a majority of it – the same stock you are about to buy at $1. Unless you actually own the company, every stock you buy will always have other shareholders in at lower prices. Knowing how many shares and how much lower the bulk of those shares are still being held is the key when deciding whether to enter the ring or go pick a fight somewhere else.
With that said; LET’S GET READY TO RUMBLE!
READ PART ONE: INTRODUCTION - Getting Ready to Get Ready - Stop Banging Your Head Against the Wall - Learning and Trading as a T.E.A.M.; Together Each Achieves More - The Financial Benefits of Trading Penny Stocks - Going Where the Money is
READ PART TWO: Trading Like the Big Traders by Trading With the Big Traders – Trading and Conducting "Proper" Due Diligence as a Group – Selling Too Soon? - Minimizing Risk/Loss – Tools of the “Trade” – Paper Trading
READ PART THREE: The Decision Process – Good News Versus Bad News - Obtaining Accurate Data – Properly Identifying Buy and/or Sell Signals – Strategies for Identifying the Right Stock at the Right Time - Your "Top Five" Reasons Check-List - Trading Your Passion - The Importance of Diversification - Effectively Dealing with Delays - Activity Creates Productivity - Keeping it Simple - Trading by the Numbers
READ PART FOUR: “The Green Baron’s Wall Street Fighting Rules” – 20 Proven and Effective Strategies for Maximizing Profits and Minimizing Risk When Trading Penny Stocks – A Must Read for Every Investor!
READ PART FIVE: Common Investing Terms and Definitions
READ PART SIX: CONCLUSION