You’re now up to Day 3 of 7.
We also had a look at why it’s extremely difficult to become rich investing in blue chips.
Today we’re going to look at how to approach small-cap investing.
We're all looking for that R5,000 investment to go to R50,000 or more.
There truly is nothing more exciting than seeing your investment account double, then double again and again. And if it's all in a short span of time even better...
But, there are a number of mistakes penny share investors make that will see them never achieve these kinds of investment results. In fact, these mistakes could see them lose BIG money!
Not all small-caps are worthy investments. Some could be amazing. Others you’d be completely crazy to buy.
And as you’ll learn, there are plenty of small-cap pitfalls. Some companies run out of cash before they can get products to market. Others are crippled by too much debt early on.
It’s extremely important to know how to limit your losses before you start.
That way you might only have a few losses and far more investments that could rocket up 1,000% or more.
Alright, let’s do it.
Let’s jump into Day 3.
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Fatal Mistake #1 - Assuming that if a stock price is low, it's good to buy
I've often heard investors ask me about buying this or that 5c share. But more often than not my answer is AVOID.
You might think the secret is to "Buy low, sell high", right? Well, sometimes. But, just because a share price is low, doesn't mean it's a good buy. And, conversely, just because the price is high, doesn't mean it's a bad buy. The mistake is not knowing that "buy low; sell high" is really shorthand for "buy stocks that are undervalued and sell stocks that are overvalued."
What to do instead: High and low are relative terms - R300 may seem like too much for a stock, whereas R3 might seem like a bargain. But you have to put the trade in context. Ask yourself if the company is under- or overvalued at its present price, based on P/E, Asset Value etc. That's the mark of a good or bad buy.
Fatal Mistake #2 - Going "All-in" on a penny stock
Penny stocks have the potential to QUICKLY double your money. In the last two years alone I've had three shares make me more than 200% each!
Now, this is where many investors start taking unnecessary risks. They invest all or most of their cash into a single share.
Going "all-in" in on a penny stock carries serious health consequences… While a big gain could help you make money much fast a loss will see the value of your investments crash to worthless overnight!
What to do instead: Only invest a sensible amount of money into these shares. I always ask investors how much money they are prepared to lose without having sleepless nights. That's how much they should be investing into each share. Not a cent more.
Fatal Mistake #3 - Ignoring liquidity
So you've got a lot of cash to invest. You're not shy of taking risk. You decide to buy R200,000 in a single penny share.
As you buy this your broker tells you that the best price he can get you is 10% above the current market price, but you REALLY want to buy this share, so you do it…
The problem is, you've just bought into an illiquid penny stock. On a good day it usually trades R150,000. Now you've gone and bought more than that all in one go.
I can tell you now, when it comes to selling this share you will struggle. You'll have to be prepared to take whatever price the market gives you, which will be lower than you could've got if you bought less shares…
Not only can making this mistake eat into your profits, it will also make all your losses bigger!
What to do instead: Follow my rule of thumb and never buy more than 10% of a share's daily value traded. That way you'll always be able to buy and sell your shares for a fair price.
Fatal Mistake #4 - No BUY Limit or stop loss
You absolutely must have some discipline when you are trading. It is all too easy to watch a share price rising, feel desperate to get aboard, and then find you’ve paid top dollar. Stick to your predetermined buy limit.
In my penny share newsletter, Red Hot Penny Shares, I set specific buy limits for my readers. You find them in the table that accompanies every buy tip.
If I alter my buy limits, as I sometimes do, subscribers are informed in my weekly e-alert.
A stop loss is designed to prevent a small loss from turning into a large one. For example, if you buy a share at R1, you determine that if it falls to 75c you will sell come what may, so that the worst that can happen is a 25c loss.
Stop losses offer some protection against unforeseen share movements. But you must remember that since penny shares can move 5% to 10% on any given day, setting a stop loss too tight can prove problematic.
Make money by avoiding these and other mistakes
The truth is that all investors make mistakes with their money. But what separates the winners from the losers are the ones who can apply what they've learned.
Then you will see your small bets turn into huge profits.
That wraps it up for Day 3.
In day 4 I’m going to show you where to look to find the best small-cap opportunities and what a typical triple digit profit play looks like.
See you then.
Red Hot Penny Shares