The Digerati Life

Why buying penny stocks can bite you. Two words: Massive Risk.

Photo by mattlehrer

I received a reader question some time ago about the subject of penny stocks, which are also known as “stocks that are priced for under $1 per share”. I’ve replied privately to the individual who asked me the question, but I thought the subject merited some discussion here, so I’m reprinting their inquiry and the gist of my response.

Reader Question:

I wondered if you would give me your opinion on a stock I own…it’s so little known that I can’t find qualified opinions elsewhere. It’s a company called Serenic that trades on Canada’s TSX Venture Exchange, which is mostly known for mining. The ticker symbol is SER.

I had long talks with management after my broker recommended it and really liked their top-line growth story, but I was convinced because the valuation seemed unreal:

The company has about an 8 million market cap and more than 10 million in revenue (small I know). They also earned 7 cents a share last quarter, yet they are trading at 57 cents! I hope I’m not missing something, the management seems very credible and understated.

First of all, I’d like to remind everyone that I am not a professional financial advisor, planner or investment professional of any sort, so what follows are all just my opinions. At the same time though, my thoughts are pretty much in line with the general consensus about penny stocks — that they are extremely risky to delve into. I also have to caution you that I have rather strong opinions about such stocks.

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Do you know how much you need to save for your children’s college education? Here are some simple tools to help.

How much have we thought about our children’s future? To be honest, we’re not sure where our own kids will be going yet; it may be way too early for that. Of course, we all wish they’ll be eligible for the Ivy Leagues, but that won’t become apparent until they’re much older. And even if they have a shot at attending such universities (and that’s a BIG IF, based on parameters such as how competitive the admissions landscape will be by the time they apply for college and our children’s “credentials” at that point), the question arises: can we afford a high-end university education?

Basic Strategies To Save For College

There are many ways to save for a kid’s education. Here are a couple of scenarios:

• Pay up now, and cross your fingers. Many people spend their funds on the best private elementary schools money can buy early on, in order to prepare their kids for possible entry into top-notch schools later. Once their kids are ready for college, they hope that their kids qualify for financial aid.
• Save now and pay up later. Others scrimp and save to meet the longer term goal of funding a college education for their child, while having their kids attend public schools at the lower grade levels. They make the sacrifices today to afford the costs of a high quality education at a prominent university later on.

For now, we’ve chosen the road from “public/semi-private school to top-rated college” (the latter route), although how much money we save will have an impact on the type of college or university our children will be attending.

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Some thoughts on how to manage your investments through any stock market climate.

So far, the prediction that the stock market wasn’t going to close on a good note this year seems to be unfolding as expected. Remember the saying which suggests that “however January turns out, so shall the rest of the year?” Well just as expected, our stock portfolio (along with the investment portfolios of countless investors out there) is suffering through the rough patch brought about by the credit and subprime lending crisis.

But before we all bemoan the decline of our net worth, I’d like to offer some words of encouragement and supply you with information that should alleviate some of this worry:

Investment Management Tips For An Iffy Stock Market

#1 Are you going to act? Then go against the crowd.

Should you sell, buy or trade? If I had the extra money to invest, I would dollar cost average or invest in a lump sum at these lower market levels.

We’re often told that the best time to buy into the stock market is while it’s languishing. If you’re wondering when to “jump” into the market, now may be a reasonable time, although if you’re nervous about committing all your cash into the market right now, you can do so gradually, using dollar cost averaging methods or you can stay cautious by reviewing these ways to invest defensively with new monies.

If you don’t have any additional savings to make investment purchases, then hang on. By reading the rest of this article, you’ll see why staying put in this market (though against our natural inclinations) may be a sensible strategy. Find out more about how investing in down markets can be a good move.

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The stock market is in a slump. Here’s how some financial bloggers have fared in this investment climate.

With the middle of the year upon us, I expected the equity markets, and thereby our investment portfolio, to experience a dip. The summer period is usually the time in the year when markets take a breather along with investors who decide to take their summer breaks. And it looks like the market itself has been on vacation for some of us financial bloggers. The group of us in the Money Writers network just released our mid-year investment performance numbers and they’re not too pretty. Only one of us seems to have eked out a small loss at this time, and that’s Frugal Trader from Million Dollar Journey.

I’m big on index investing so my portfolio tracks their respective index benchmarks closely, whereas some of the other Money Writers have their positions in managed funds and may have a higher concentration of investments outside of the U.S. (as I expect Frugal Trader to have, being from Canada). Also, our asset allocation models are all different: while some of us are playing more conservatively, others are more fully invested.

I’d classify my portfolio as moderately aggressive (or moderately conservative, depending on whether you see the glass as half empty or half full), with a 25% cash position that simultaneously stands as a bear market buffer, as a source for emergency funds and as money my family withdraws to pay for our current expenses while my spouse and I work on a startup and small business.

The Money Writers all have our different goals and objectives and personal circumstances in life, and that will partially explain the variances in the constitution of our portfolios and their returns. We may all be in the red for now, but we remain committed investors all waiting for the market coasts to clear.

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Our stock portfolio is languishing; how is yours doing?

I haven’t discussed our portfolio for some time now — the last time I reported on it was many many months ago, and I’ve got an excuse. I was simply not excited about letting you all know how much money we’ve lost since my last formal portfolio report.

The thing is, this investment climate has been cruel to most investors. But the opportunity to do another formal portfolio check up arose when my fellow Money Writers decided to do a group writing exercise that involved revealing our recent investment returns — something like a “misery loves company” kind of sharing . If you’re curious, our group writing project yielded the following writeups from my blogging colleagues:

• Mid Year Investment Portfolio Checkup 2008 @ Million Dollar Journey
• The Money Writers Portfolio Project: An Inside Look at My Portfolio and Performance This Year @ Gen X Finance
• Investment Performance Update: Bleeding Money! @ Money Smart Life
• I Share My Asset Allocation (as do 7 other Money Writers) @ Lazy Man and Money
• What are My Investments and How are They Doing So Far? @ The Sun’s Financial Diary
• Mid Year Investment Portfolio Update @ My Dollar Plan
• Mid Year Investment Portfolio Checkup @ Brip Blap

As for me, I spent a good part of this weekend evaluating our investments and coming to terms with the devastation I expected to see. It was unnerving alright, and made more awful by the fact that we had been heavily drawing down from our cash savings to cover our lack of work income over the last couple of years.

Here are some details of our investment portfolio. I measured its performance over the last 2 to 3 years and plotted the results:

 
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To make money in the stock market, all you need is a proper asset allocation and time.

If you’re nervous about the stock market recently, you’re not alone. Your anxieties over your investments may be attributed to several reasons.

• Could you be overexposed to the stock market?
• Is your portfolio too concentrated in just a few asset classes?
• Have you been investing for only a short period of time?

If you agreed with any of these points, then your concerns may be justified. But fear not! By reviewing past stock market performance and by appreciating the evidence put forth by long-standing investment principles, we should be able to develop portfolios that are less vulnerable to market swings and which can afford better returns over time.

I know some people who will never put their money in the stock market, arguing that “it’s just like gambling.” I get into some in depth debates with them about this, but to no avail — some people just equate stock market risk — or maybe any investment risk for that matter — to gambling risk, which is the worst kind of risk since the odds are set against you.

True, there is risk with participating in the stock market, but this is something you can easily control and manage when you take a few strategies into consideration. You won’t need a doctorate in economics to become convinced that these strategies work: the historical performance of market portfolios can speak for themselves. From my studies and experience, I discovered that I’d do well with the stock market if:

#1 My investments are well-diversified and have a reasonable asset allocation. (Diversification)
#2 My investments are subject to a long enough time horizon. (Time)

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How do international stocks affect your stock portfolio?

The U.S. stock market hasn’t been doing too well of late. It’s hovering at its lowest point of the year, although it appears to be a reflection of all the bad news we’re seeing in the economic front recently. High gas prices, high food prices, high prices everywhere. Spending is up, savings and investments are down. The only other thing down in the dumps along with the markets and the economy is our collective mood about our whole financial situation.

But it’s times like these that you may want to review your portfolio’s allocation. The weightings on your portfolio may have shifted over time and now that it’s the middle of the year, it could be a good time to revisit your investment set up.

This is also an opportunity to decide whether you’d like to keep with the same allocation you’ve always had.

For the record, we’re currently between 25% to 30% invested in foreign stocks at the moment.

Yet my spouse is eager to do more to hedge our investments and go further into foreign holdings. He’s asked about possibly raising our international allocation to match the representation of foreign equities in the global market, which is around 50%. I’ve also known some people who have dumped their domestic holdings completely in favor of foreign equities. With the dollar in the dumps and everyone wanting a piece of America for cheap, I can see why folks are eager to take flight into international funds.

Not sure I’m convinced about following suit to this same extent. 50% in non-U.S. stocks seems very aggressive to me. I’m no longer single, young and carefree… and no longer as comfortable with this type of investment risk. But to lend credence to my concerns, I researched this topic further and reevaluated our foreign allocation strategy.

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What does a market crash look like?

Forget charts and graphs, if you want to see what investment risk, a market slide or a volatile stock looks like, then here’s a different kind of visual.

All around the world, a market crash looks the same, etched in the faces of many who watch it unfold. When stocks falter, we are faced with the global reactions of disbelief, shock, dismay and fear. This just brings home the point that we’re all tiny cogs in a huge economic wheel that works the same no matter where we live or who we are. Greed and fear are universal. And we’re all at the mercy of the same dynamic forces and factors that make us rich or poor. We are the market after all.

~ The Faces Of Market Gloom and Doom ~

Frankfurt, Germany

A trader reacts after the news of the Bear Stearns buyout on March, 2008.

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