Penny stocks: Expressway to riches?

I know I was never an advocate for playing penny stocks & would have never thought that I'll venture into this field of play until recently when I thought to myself "why not allocate 5-10% of my portfolio to penny stocks?" First of all, I'm young & hence I'm able to take the risk. Additionally, the money that I currently have won't be needed anytime soon in the next 5-10years. Lastly, if I play penny stocks well, I can increase the overall value of my portfolio a little faster than if I were to invest only in the slow but sure way.

A pleasant surprise struck today when I was able to make a 50% gain over my initial capital by offloading one of the penny stock counters I bought 2 weeks ago. That's insane. 50% return on capital in less than 2 weeks. Which other investment vehicle/product allows you to do that? Now I know why some people don't bother investing the slow but sure way (5-10% annual returns) but are instead lured into trading penny stocks exclusively (>10% annual returns).

No doubt that penny stocks can make you rich extremely fast, it can also be excruciatingly painful when you lose your capital or have your money "stuck" when the stock price remains stagnant. As the saying goes, "high risk for high returns". I wouldn't say this is akin to gambling as I feel even though penny stock prices are largely based on market sentiment, there are still ways to make calculated risk, some basic chart analysis & simple understanding of trading volume can be applied before deciding which penny stock to buy. After you buy, it's all a waiting game. You just have to be patient & wait for the right time to sell your position. Penny stock prices are largely based on market sentiment which is known to be illogical & irrational. However, by keeping abreast of current financial news, you can roughly predict market sentiment for the next day or so.

No wonder there are people who drive flashy cars & live in luxurious homes when they are only in their 20s or 30s. That said, I also know of people who have burnt their hands so badly playing penny stocks that they have to resort to selling their house to pay off debts. One big life lesson to learn from bankrupts is to never ever ever ever borrow money to invest. Even if you wish to leverage on borrowed money, do so in such a manner that you can still repay off your debts even after your investments have gone wrong.

So are penny stocks an expressway to riches? Definitely a yes but will I ever be a convert? I would say no. I will never allocate more than 20% of my capital into penny stocks. Will I advise playing penny stocks to new investors? Probably not. For starters, I feel it's better to start with lower risk stocks to build confidence before advancing into higher risk stocks if your risk appetite allows you to do so. That's exactly what I did. I went into mid-cap stocks first then proceeded onto buying small-cap stocks & now, penny stocks. A common misconception is that all stocks have the same risk level. A person who has zero knowledge about investing will easily brush off the stock market as a dangerous playground meant only for the rich or industry experts/professionals. But I feel otherwise. In fact, it's always heartening to know friends who wish to embark on their own investing journey. I usually encourage them to do so as I feel Time is on our side; Our greatest asset is Time.

Book review: the coffeehouse investor -Bill Schultheis

3 basic investing principles advocated by Bill Schultheis & it's a great for anyone who wishes to invest their money wisely but do not quite know where to start. If you're someone who doesnt know which company to invest in or is often troubled by the numerous daily stock analysis reports or have thoughts of hiring a fund manger to manage your money, you must read this book.

I like how the author emphasized so much against leaving your money with mutual fund managers. He also talked about Wall Street's "tricks" (Or SGX in our local term) about how it tries to keep investors "active" so that it can continue to earn our trading/transaction fees -brilliant pointing that out, Bill!

I love this book & I fully agree with his concept of investing in exchange-traded funds (ETFs) or unmanaged index funds to stay stress free & have more time doing things you actually love doing in life (definitely not looking through company's annual reports, expert's stock analysis reports, stock magazines/articles etc). Though I personally do not own any ETFs as of yet but I will be looking to add it to my portfolio in the near future. He's a firm believer of capturing the stock market's total return in the long-run & that's what an ETF or an unmanaged index fund does exactly. Might be a little hard to understand if you have zero knowledge about investing and stock market but nevertheless, I feel it'll be a good read. It'll be perfect for people with at least some basic investing knowledge. Definitely challenges the thinking and principles of seasoned investors.

I've read about twenty to thirty over books by now & the fact that I actually bothered to dedicate a post to this book surely means something. I hope you'll take time out to borrow this book or buy a copy of it online as I guarantee it's worth every single minute of your time reading it.