Well, after having my rear end handed to me by the penny stock markets recently, I decided to take a small break to regroup and get my mind back in the right place. Every successful trader has had periods of poor trade performance or drawdowns, and it’s one thing you’ll have to learn to deal with as a penny stock trader. One of the biggest obstacles you’ll have to learn how to overcome is your own negative thoughts once you’ve had a bad trade, or a losing trade. Many traders, once they experience one good “whipping” at the hands of the markets, do the sour grapes thing and begin saying that penny stocks are a bad idea. Anyone that has ever called penny stocks a bad idea is, in my mind, operating from an inaccurate assumption. The only reason why I’m even writing this is because there’s a lot of “cyberjunk” out there regarding penny stocks, and a lot of people that hardly even know what they’re talking about are making commentary about the risks of penny stock trading as though it’s the bubonic plague of the investment world or something. One thing I want to clear up from the onset is that any (and I mean ANY) investment can be risky at any time, IF the investor doesn’t fully understand what he/she is getting into. Most people would consider bonds to be on the safe side of the investing world (although, in my humble opinion, U.S. Treasuries are total crap right now due to extravagant monetization of debt by our government), but tell that to anyone who invested in the junk bonds of the 1980’s. Now I know that there are probably a lot of armchair economics professors who would love to debate the finer points of what I’m saying here, but I think you get my general drift. Lack of understanding of the risks of a particular investment, and a misunderstanding of the true performance potential of a particular investment, can be the cause of an investor’s downfall in that investment instrument, whatever it might be. For instance, if you think you’re going to get a 300% return in one year if you put your money in Google’s stock, you’re living in a fool’s paradise and you really need to do a lot more homework. This actually leads me to a point about penny stock trading that I think cannot be overlooked. The reason why people will warn that penny stocks are a bad idea is because they don’t understand the “nature of the beast”, if you will. It’s a lot like that movie “Avatar”; I forgot the name of the planet that the blue people were living on (I think it was “Pandora” or something), but to the Earthlings, the planet was dangerous, treacherous, and hostile, but to the natives (the blue people), it was simply home, and they were so in tune with their environment that all perceived threats were minimized. That is a very accurate analogy for how the penny stock world is; those of us who are familiar with it and have made it our “home” for many years don’t feel threatened or out of control at all; we understand the nature of the markets, and what the risks and limitations are of the markets. When you’re equipped with the proper knowledge, the penny stock markets are not intimidating at all; and I think it’s really only the people who lack that knowledge that are the ones who try to put a negative spin on the markets.
So why fear penny stock trading? What is there to fear? What makes it such a “bad idea” in some people’s minds? Let me ask you this: Is fire a bad idea? Fire is bad or good only based on the way that it is utilized. To a silversmith, fire is a way to purify and shape the metal to achieve the desired effect, and something beautiful can be produced as a result of properly utilizing the fire. But in the hands of an arsonist, fire can be a destructive force that causes loss and harm. Same thing with penny stocks; to a chart reading technical trader, penny stocks are a powerful wealth-creating vehicle, but to a novice investor, penny stocks can be a quick way to lose tons of loot. I’ll never forget a quote that I heard attributed to Warren Buffet, where he said “With enough investment advice and a million dollars, you can go broke in a year.” That is so true…what the quote speaks to me is that eventually, you have to carve out your own path. You have to take all of the knowledge you have accumulated from different sources and come to your own conclusions about penny stock trading. One thing is for certain: You will ultimately be the one who benefits (or pays the price) for your investment decisions, unless you get into managed money or something, but even then, it would ultimately be your decision who would manage your money. I am a firm believer that nobody cares more about my money than me, so that’s why I have chosen to be in the category of a “self-directed” trader instead of just handing my money to a broker or an investment advisor and then merrily going on my way. I think that trading penny stocks in particular requires your own personal active engagement. If you will take the time to read books like Ted Warren’s “How to Make the Stock Market Make Money for You”, and other books of that caliber, and if you will do your part to study price action and trading using charts, then you will set a good foundation for a profitable trading career. The leverage that penny stocks offer makes the actual process of making money fairly easy, but you must be willing to do your homework and be responsible for your own trading education. With these things in place, penny stock trading may turn out to be a good idea after all.
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