Surviving and Profiting from Penny Stock Manias - dummies

Surviving and Profiting from Penny Stock Manias

By Peter Leeds

There are ways to win in a trading stampede, and they’re all about timing. Successful investors recognize when the trampling masses are driving higher and anticipate that sudden moment where the mob shifts, reality sinks in, and shares plunge.

In penny stocks, this is the greatest game of hot potato you’ll ever play. Here is what you need to know to end up profiting, rather than getting wiped out:

  • Recognize the mania. This is by far the most important aspect of coming out of a stampede on top. If you don’t see the mania for what it is, you’re already going to lose.
  • Focus on fundamentals. No matter how excited everyone seems, all penny stocks have a realistic value. The shares may detach from fair prices during a stampede, but this goes away as soon as reality sinks in. Look at the financials of the businesses involved. Do their share prices make sense, when you see their tens of millions in debts, ongoing losses, and zero revenues?
  • Remember that timing is everything. This is more like gambling than investing. This is fully and completely merely a game of timing.
  • Check your greed at the door. With investor stampedes, it’s always better to cash out too soon than to hold too long. Besides, there will be plenty more investor stampedes just around the corner.
  • Watch media coverage levels. Television, newspapers, and online sources will be all over the story — until they aren’t. By the time you see the latest mania covered in a magazine, especially if it’s a front-page story, this stampede has played out.
  • Don’t forget the grandma indicator. In any bubble, when your grandma (or cousin, or sister, or college roommate) starts talking up the investment you think is in mania territory, you’ve probably got about a day and a half to get out.

Manias are a great way to make money trading penny stocks. However, your success (or failure) will be predicated on awareness of the reality of the stampede. By understanding that the shares are overvalued, and that the primary driving force is simply that more people will be piling in, you’ll have an understanding of when to cash out.

In stock market lingo, this is known as the “greater fool” theory. As long as there is someone willing to pay you more for an asset, you’ll be able to unload it for a profit. The problem arises when you’re unable to find a greater fool.

All manias are just high-stakes games of hot potato. This has little to do with investing, and the shares you’re trading almost certainly have no right to be trading anywhere near their current value.