Use these three tips to spot winning penny shares
There are over 200 penny shares quoted on the Johannesburg Securities Exchange, in which you can invest in. Each week, various contacts will suggest looking at over 80 shares that have some potential. But if you're to make any gains while investing in penny shares, you have to separate the winners from the given universe of shares by eliminating all the obvious losers. Here are three tips you can use to do this…
Billionaire investor Warren Buffett’s strategy is to always look at the downside of any prospective investment and, if it looks too risky, he’ll walk away, no matter how tempting the upside is.
As he puts it: “Rule number one of investment is not to lose money. Rule number two is to remember rule number one”.
Senior Analyst at Red Hot Penny Shares Francois Joubert, shares the same sentiments.
According to Joubert, the filter method of share selection comes in two parts: Non-financial and financial. “These are qualities that should always be the basis for all investment decisions, but are too often ignored in the hype one hears from certain stockbrokers,” warns Joubert.
So what should you look for in the non-financials to determine if a company has what it takes to be a winner?
Use these tips to spot small companies that’ll give you great returns on your investment
Management is crucial. Always check if a company’s senior managers are demonstrating real financial commitment to the company. They must be committed in a financial sense to grow the business and reward their shareholders, “It’s disheartening to see senior managers whose pay levels and annual remuneration increases bear little relationship to the company’s record of adding value for shareholders,” says Joubert.
Let the trend be your friend. It’s usually better to invest in shares that are on an upward trend than ones that are on the reverse, a sensible investor should let the trend be his friend. “A share may look cheap, but if its price is on a persistent downward path, it often means someone, somewhere, knows something bad,” warns Joubert. If you were aware of similar information, chances are you wouldn’t think the share was still cheap.
Listen closely – what’s said, is often not what’s meant. Reading between the lines isn’t always easy, but sometimes it pays to take notice of hints that all may not be well. This involves being a “psychologist to some degree, but often the small nagging voice deep down inside indicates danger,” Joubert advises.
There you have it! Using these tips will help you separate the winners from in the penny share universe from obvious losers.