Penny shares can go up or down very, very quickly.
They’re just not as liquid as blue chips.
So sometimes there might be someone with a lot of shares needing his cash quickly and they sell their shares on the market. With a blue chip, this wouldn’t be a problem. But with a penny share, it could mean the share price drops temporarily.
And with this kind of volatility comes the first big mistake penny share investors make. They put too much cash into the shares.
For example let’s take a recent share tip of mine…
I tipped Aquarius Platinum when the share was around 695. It had a dip to around 650c two weeks ago as the rand strengthened against the dollar. Then, after higher volumes the buyers for the share suddenly died down and it crashed to 545c.
If you put R100,000 into the share, you would’ve lost around R21,500.
Now, in my experience, most investors don’t stick to their guns when they see a loss like this (even if it has nothing to do with the underlying investment case) and they just sell their shares…
Two days later though the share rebounded. And today it’s trading at 745c. So the R21,500 loss could’ve turned into a profit of R7,194 overnight!
What I’m getting at here is that if you put too much money into one share, and a risky one at that, you will get a fright when it makes big moves overnight. And you will be tempted to take losses that shouldn’t be losses at all…
So don’t bet more than you’re comfortable losing on a single share – Or you will scare yourself out of what could be a profitable position. And never bet everything you’ve got on a single tip. That’s just a bad idea.
Classic Investment Mistake #2 – Investors think this time’s different and change their strategies!
The world changes every day, but what drives the market doesn’t.
In the long run, share returns are driven by earnings.
There might be short periods of irrationality, but in the end, when companies keep growing and increasing profits, their share prices will increase too.
But when markets get choppy, like we’ve seen in the past few months, many investors start casting doubts on what really works and follow the crowd.
That’s a mistake – Stick to your guns!
If a share you’re holding is growing its business, making more profits and even paying you a dividend, it’s just a matter of time before the market will start ‘appreciating’ it. Just be patient and stick to your plan and you will be rewarded!
This year Red Hot Penny Shares members have had the opportunity to cash in on two winners of more than 200% each!
If I take our last 200% winner, Poynting, for instance: At times holding the share was scary. The one day I was checking it, it dropped 36% from around 165c all the way down to 105c in less than a week.
Had you bet everything you had on it, you might have lost faith in the share.
But looking at the business, I knew it had cash on hand. I knew it was growing its business and that an acquisition it had in the pipeline would add a lot of profit to the bottom line. In short – It still got the thumbs up sign from my PowA! strategy. So I held on.
And we were rewarded well for that patience – As the share shot up to 230c before we took our gains off the table!
If a little temporary drop in share price had us changing our strategy – That 200% plus in gains would’ve been lost to us…
Classic Investment Mistake #3 – Not understanding what diversification really is!
Diversification ties in well with the first two mistakes.
Obviously, if you buy only one share with all your money, you’re not diversified.
But there’s more to diversification than just the number of shares…
I once had an investor ask me whether he’s diversified his portfolio enough. But when I had a look at his portfolio, it contained a gold ETF, a blue chip gold miner, a junior gold miner, a gold exploration company, some warrants on Harmony gold, and some gold coins.
Different investments in the same sector or asset class do not help diversify your portfolio. A drop in the gold price would see EVERYTHING in the above portfolio drop in value.
Similarly, I’ve had investors ask me why their portfolio isn’t doing well at a stage; upon a closer look they held coal miners, gold miners, platinum miners, steel producers and mining service providers.
Again, if you go through a period in which the mining sector as a whole struggles, all those shares will struggle.
If you want a diversified stress-free portfolio you need small and big shares, shares in different sectors, and – even more importantly – Your investments shouldn’t all be in shares. You should also include alternative investments such as physical gold, real estate, small
businesses and bonds.
So don’t make these three mistakes and you will maximize your earnings by letting your profits run; and minimize your risks by not overexposing yourself to any one investment.