I recommend developing a penny stock portfolio because its a good way of developing your instincts as an investor and business acumen. The aim is to make consistent and sound investment decisions that allows you to grow your money over time.
Small Stocks are very sensitive to the Market trend. They have among the largest Betas in the market. Betas are a measure of uncertainty - it also measures the tendency of a stock to move in relation to the market. A positive beta means the stock moves with the market. The size of the beta determines the magnitude of the move. When Market is up by 1%, a stock with a beta of 2 would deliver 2% return. Conversely, when the Market is down by 1%, small stock would be down by 2%.
The rules are:
1. 3 - 5 year time frame.
2. Buy and Hold strategy.
3. Dividends to be retained and accumulated for future investments.
4. Preference for Value over Growth. Defensive. Be very defensive.
Portfolio Performance Measurement:
1. Year-on-Year returns
2. Year-to-Date returns
3. Because your holdings are so small, you could have put the money in a money market fund and earn on average 3% return. You win if your portfolio returns more than 3%.
Stock Selection Criteria:
1. Share Price: $0.01 - $0.30
2. History of Dividend Payments
3. Dividend Yields: 5% - 20%
4. Operating Margin: More than 20%
Valuations:
1. Good management.
2. 'Deliverable' Earnings - that means they've got customers, and income booked.
3. Competitive Advantage.
4. Promising future.
5. Transparency in business activities.
6. Business is linked to major market trends - aging population, growth of China, increasing energy and oil demand, Integrated Resort development.
7. Determine share price Fair Value (Take Company's Market Cap (printed in end of year report) divide by Outstanding Number of Shares. Use this Price as Default Price. Buy the stock when it is trading less than this default price.
Timing:
1. Buy when everybody else is selling - usually in December or June! Identify the trend, determine market sentiment and be patient.
When to sell:
1. Definite sell: When a better investment arises.
2. Maybe sell: When you lose confidence in Management.
A business is only as good as its Leaders. No matter how good a product, or profitable a business is, or how smart the managers are, if the bosses are unethical, and behave inconsistently with how good business leaders should behave the earnings stream becomes very questionable.
Think Long Term. Form your own judgments. Trust your instincts.
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