Buying Penny Stocks: Are You a Investor or a Trader?

Are you a trader or an investor? This is an important question to ask (and answer) before you jump into the arena of buying penny stocks. On the surface they would appear to be the same thing, but the truth of the matter is, a trader is not always an investor, and an investor is not always a trader. Many people believe that if they buy a penny stock, they can call themselves an investor. This is not always true. If you want to get to the most pure definition of what an "investor" really is, it is not limited to just the stock market. An investor is someone who has the mindset of being able to take whatever is put in front of them, and make it bigger, better, and more profitable. This is true, whether you're working with a block of stock shares, or a piece of real estate, or even the debt portfolio of a large company. The one thing that an investor will have across the board, regardless of what particular area he/she chooses to focus on, is the ability to spot opportunities and capitalize on those opportunities. This holds especially true in the arena of penny stock trading, although as a general rule, the investor has a more long-term view in mind than a trader does. With trading, by virtue of the very nature of the word, it is simply a one-time transaction that hopefully produces a profit. With trading, you're not trying to commit to the company's management. You're not trying to figure out what the future of the company will look like. A trader could really care less about what products the company offers. Heck, a true technical trader (like myself) most of the time doesn't even know what the company DOES...he just looks at the chart, recognizes proper price action, and then buys the stock in hopes of later selling it for a profit. I guess you could say that an investor is a lot more emotionally and mentally invested in whatever he's putting his time, energy and money towards, while a trader just wants to get in and get out, as soon as possible, with as much profit as possible. I will have to admit, I belong to the latter category, and I'm not even sure that I'm ashamed of it.

As a good example of the quintessential investor would be Warren Buffet. Truckloads of books have been written about Buffet's investing style, and about why he is considered to be the "best investor in the world". To Buffet's credit, he obviously is doing something right, because he has a net worth in the billions of dollars. Nobody can argue with that. Would you call Buffet a trader? I say "No". See the difference? He doesn't "play the markets". He doesn't have a room with tons of monitors and trading screens, all giving him indicators and oscillators and regurgitators (okay, I made that one up), spouting out buy and sell signals...well, at least not to my knowledge. As a matter of fact, he's been hanging out in Omaha, far from the clutter and noise of Wall Street. One of my favorite quotes from Buffet is this: "Wall Street is the only place where people who drive Rolls-Royces take advice from people who ride the subway." So true. He maintains the investing philosophy of buying and holding for a looooonng time. As a matter of fact, he has been quoted as saying "Our favorite holding period is forever." In the world of investors, Buffet definitely stands head-and-shoulders above the rest. But, I think it would be a stretch to call him a trader. His "buy and hold forever" philosophy actually runs counter to how a trader thinks. The trader is concerned about how quick he can get his money back, with hopefully some extra on top of what he put in. The trader has one goal in mind: Spot the most profitable opportunity at the time, strike while the iron is hot, get in and out with the least amount of time in between as possible, and exit with a fat profit. Once you can master these actions, it's simply a lather, rinse, repeat type of deal. This definitely describes my penny stock trading style more than anything else.

Am I slamming the longer-term, Buffet-like investment approach? Absolutely not. As a matter of fact, part of the way Buffet thinks is actually a very necessary quality to have. Even though I want my trades to work out perfectly right off the bat--meaning, I want to get in and watch the stock immediately shoot to the moon--most of the time it doesn't happen like that. Patience is definitely required when trading penny stocks. You have to literally be willing, as Buffet implied, to wait "forever" if necessary to see the stock do what you're believing it's going to do. Now that doesn't mean that if the stock is tanking at record speed you just hang on forever (just ask anyone who had an Enron 401-K)...you do have to employ some reasonable money management skills with your trading capital. You definitely have to learn how to "cut your losses and let your winners run", as they say. But, if it's taking longer for that winner to run than you would like, don't make a stupid move out of impatience and just sell at a loss because it's "not happening fast enough". Be willing to see the chart formation through, and if the formation happens to crap out, then it's time to bail. I have had that happen many times. I have seen certain chart formations develop, that I thought were going to be money in the bank, and for whatever reason, they just crapped out, much to my disappointment (and hurting pockets). Hey, that's part of the game. I'm telling you, with every experience you gain something, even if it's not more money (LOL). You will spend a lot of time learning what NOT to do in the markets, I can tell you that. My suggestion is to be both an investor and a trader, and have the "quick step" of a Marty Schwartz, with the patience of a Warren Buffet. Put those two together, and you'll be buying penny stocks successfully.