Investors who have a fixed idea about the future value of an investment often make the wrong decisions in the present.
It’s essential to avoid letting an investment opinion turn into a fixed idea about the future value of an investment. Instead, keep an open mind. Nobody can consistently predict what stocks will do. You should always look on your opinions as tentative and subject to continual review, in light of any new information that comes along.
If you develop a fixed idea about what happens next or in the future, especially in penny stocks, chances are you’ll quit considering new developments or contrasting opinions. You may decide you don’t need any new info, since you already know the answer!
Worse, you may develop an unconscious filtering mechanism. You may zero in and dwell on news and commentary that supports your fixed idea, while disregarding news and commentary that supports other points of view.
How to get better odds with penny stocks
Although most penny stocks fail, you can hit spectacular gains with the right penny stock. Pat McKeough shows you to reduce the risks and increase your chance of uncovering a big winner. Your free complete guide to investing in Canadian penny stocks is ready to read now.
The future of an investment is not discovered through hype
Some investors think the best way to profit in stocks is to buy them when they are just barely starting out on a growth phase they hope will last for years if not decades. Ideally, they want to buy the future top performers when they are still near or close to the penny stock range and have yet to be discovered by the broad mass of investors.
And it’s true that when you buy penny stocks you could have a big payday if you make the right choice. But the odds against success are high. Penny stocks are almost always involved in riskier ventures, such as finding mineral deposits that can be mined at a profit, commercializing unproven technologies or launching new software.
When penny stock promoters manage to make a deal with a major firm, they often go to great lengths to make it seem bigger than it is. Instead of announcing that the big company has invested, say, $50,000, a stock promoter may issue a press release saying the two companies have entered into a “multi-stage development plan.” The release may say the major company has agreed to spend “up to $10 million” or some other exalted figure. It will usually provide a toll-free number or web address for investors to order or download the glossy brochures.
It pays to remember that a big company doesn’t go into a situation like this the same way you do. If the big company agrees to spend $50,000 to study the mining property, new technology or pioneering program, it will also insist on a series of options that let it invest ever-larger sums on favourable terms. But the big company will always reserve the right to drop out and cut its losses. In most cases, it will exercise that right.
Instead of trying to predict the future of an investment, which is nearly impossible in penny stocks, diversify across different market segments, like software, biotech, technology, mineral exploration and so on.
If you’re buying penny stocks that are perpetual money losers, they will eventually go broke, no matter how impressive their technology. But if a stock makes even a little money, it can stay in business and perhaps reap the bonanza of a new product. Diversifying helps this effect, and since you should only invest in penny stocks with money you’re willing to lose, you may have a greater chance at winning.
The only way to minimize the risks of predicting the future of an investment in penny stocks
The best way to make money with penny stocks is to do your research. For example, if you’re investing in penny mining stocks, look for experienced management with a proven ability to develop and finance a mine.
Also when investing in penny mining stocks, look at environmental constraints in places where junior mines are exploring for minerals. In Europe and certain parts of the U.S., junior mines need a particularly rich find to justify the costs of overcoming environmentalists’ objections.
And when we recommend junior miners that explore for minerals, we prefer those that operate in an area whose geology is similar to that of nearby producing mines.
Leave us a comment below and tell us your most interesting story about a penny stock that either flopped or went on to grow.
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