Sources for Penny Stock Advice - dummies

Sources for Penny Stock Advice

By Peter Leeds

Most penny stock investors begin the process of choosing stocks by getting leads from third parties, such as newspaper articles, financial newsletters, and stock screeners. These and others sources can be a great jumping-off point for your own due diligence, but the source of the information matters tremendously.

The best way to approach penny stock investing is to get picks from a reliable, unbiased source with a great track record, and then apply your own due diligence to those shares. The most successful investors combine their own common sense and hard work with high-quality information sourced from a third party with an excellent track record.

An important part of this approach involves getting the best picks in the first place. This is a skill you will refine over time, as you are able to assess the quality of the information by seeing how the picks actually perform on the market.

Your number one ally: You

The first and most important step to being an effective penny stock investor is to trust yourself. Use common sense, and believe in the power of your own instincts.

You are far and away the best person to trust in your trades, because you

  • Remain constant.

  • Will improve.

  • Won’t trick yourself.

  • Have your own best interest at heart.

At the end of the day, you should take full responsibility for any and all trades you make. Never blame anyone except yourself for losses and use those mistakes as opportunities to become better rather than as reasons for regret.

The motives of others

Any time someone introduces you to a potential penny stock investment, you first want to figure out his true motivations. Often numerous motivational influences are at play.

Among the reasons that an individual or organization may the shares of a specific company in front of you and other investors are

  • They want to be on TV. Just like winning the Super Bowl is the pinnacle of football, getting on certain shows is the peak of the investment world for many people.

  • They’re contrarian. Contrarians go against widely held beliefs only to stand out or shock people. Of course, sometimes contrarians are right, but you want to avoid people who take a contrarian position merely for the sake of standing out from the crowd.

  • They want to be right, no matter what the facts say. People love to be right. This applies to guests on the most popular stock market shows as much as it does to third graders.

  • Sticking to their guns. Analysts often double-down on prior comments, especially when that statement is proving to be incorrect. By saying the same thing, they often feel like it erases their earlier error and makes the current situation look that much more compelling.

  • They don’t care. Sometimes an analyst would rather be deep sea diving or golfing.

Try to identify the real reason behind people’s recommendations. Look beyond the surface to find out what’s really driving them and their opinions. Very often their true motivations will be far different than the superficial reasons.

Review their track record

All stock market analysts and newsletters worth their salt provide a track record of their past selections. Ideally, that track record will cover at least a full year, but of course longer time frames are even more revealing.

While any stock picker may have a good year, if they can show consistency over several years, as well as through both up and down markets, then you may be able to increase your trust and reliance on their selections.

Before you put any faith or trust in any source, first make sure that they provide their track record for previous selections. If they offer one, you need to ask yourself why they are not promoting their success. And the answer may be that they don’t have any.

You next need to decide if you trust the track record. Especially in online formats, it’s easy to post misleading or just plain inaccurate information.

A great way to ascertain the trustworthiness of a newsletter’s track record is to follow along with its picks in real time. Watch to ensure that it includes each pick it makes in its data.

Paid advertisements

Whether published by a promoter or professional investor relations firm, the moment the coverage is produced in exchange for compensation, it loses all credibility.

Whenever you read any comments about a publicly traded company and its prospects, before you actually put any stake in the information, take a moment to find out if any money exchanged hands. Stock promoters have a legal obligation to disclose any compensation they received for talking about a stock.

This information will usually show up in a disclaimer. Cleverly, the publisher will attempt to hide the fact that their opinion was “bought” by only mentioning it in small print on page two, surrounded by paragraphs of text.

Unreliable analysts

Sometimes even the most popular, highest paid analysts make the wrong calls. They may even hit cold streaks, where they make a series of bad calls in a row. You need to be able to distinguish good analysts having a bad streak with just plain bad analysts.

Unfortunately, many analysts consistently make poor suggestions. Even if the analysts are unbiased and work with a top firms or newsletters, they simply may not be good at selecting stocks. As an investor, if you choose to follow any analyst, your job is to determine the quality of the ongoing opinions that she or her firm provides, and do complete due diligence even on the highest-quality penny stocks.