Spotting the Next Penny Stock Mania - dummies

Spotting the Next Penny Stock Mania

By Peter Leeds

People typically continue to do what they’ve always done, which means that, barring any widespread shift in human psychology, there are more stock market manias to come. Specific factors ensure future investor stampedes, just as there will be predictable outcomes when such events inevitably arrive.

Why the next mania plays out

As long as people get motivated by certain specific factors, they’ll fuel the next mania. This is assured.

Consider what has driven all previous stampedes — because they just so happen to be the exact factors that will cause the next one:

  • Excited group thinking: As a collective, when an exciting concept is shared among people, the impact it has will multiply.
  • Urgency: There is not an unlimited time frame to get involved. If you’re going to be a part of this mania, you’d better hurry, or else you’ll miss the boat.
  • Quick profits: The reasoning that fast money can be made may be the single greatest motivating factor. If you witness friends and family cashing in, you’re that much more likely to get involved yourself.
  • Weak logic: At first glance, the logic will seem like it makes sense. Most people stop thinking too much about the concept at that point, instead of getting really subjective. No one wants to potentially poke holes in the stampede from which he’s wanting to profit.
  • Simple enrichment: The profits to be made seem pretty simple, and to get involved isn’t very complicated.

Most stampedes are driven by all these factors mentioned, but in some cases a mania may be set off with just one or two of them. In general, the more of the mania drivers that come together, the greater the magnitude of the eventual stampede.

Unfortunately, you don’t know exactly when the next mania will occur. This is the whole timing game, and often you won’t even see the rising stampede at first. However, it is a certainty that there will be another mania. Several more actually.

The folly in the words, “This time is different” still applies to dot-com stocks, the Bitcoin mania, and Dutch tulip bulbs, just as it will to whatever upcoming stampede next runs through investors.

How the next mania plays out

Typically, a mania plays out whenever people have fully forgotten the effect of the last one. This usually means you’ll see a midlevel investor stampede every four to six years and a major one every decade.

The actual anatomy of each stampede is identical and always will be, but they’re usually predicated upon something that feels “new” or “unique” at first. Tulips from Asia, the information superhighway, legalized recreational marijuana. . . .

Take any new concept (such as 3D printing, as just one example). If the concept shares many of the factors mentioned here, which drive rampant speculation, you may be witnessing the beginning of an investment mania.

Watch for the telltale signs: group excitement, quick profits, weak logic, simple enrichment, forgetfulness of the previous stampede. In such an event, you may have found yourself a full-blown penny stock mania.

Identifying the stampede is only the first step. If you want to profit from the event, you’ll want to get positioned early on, and then make extra certain to be one of the first investors to jump ship. Selling too soon will be significantly more profitable than selling too late. This is true of any investment, but they’re words of wisdom that apply even more directly to investor stampedes and penny stocks manias.