Investing in penny stock gainers is risky enough without using a “black box”. Plus here’s a great rule for taking penny stock profits

To succeed as an investor, you need to hold on to your best picks for lengthy periods. If you’re too quick to sell, you’ll never hold a stock that vastly outperforms the market, and you need a few of those to offset the inevitable disappointments.

On the other hand, selling half of penny stock gainers that surge helps you guard your profits. But apply this rule only to more aggressive stocks, and not to the well-established stocks that may surprise you by going a lot higher in the long run.

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Profiting from your penny stock gainers—more on our sell-half rule

The problems we encounter looking for stocks to recommend, and the solutions we come up with, help us to give our readers unbiased, practical advice. This serves as a counterweight to advice you may encounter elsewhere that is based on misapplied theory, or tainted by conflicts of interest.

Knowing when to sell a stock is one of the most important factors in successful investing—it’s almost as important as knowing when not to sell. That’s why we advise investors to follow a key rule when it comes to rising stocks.

For instance, an investor recently told me that he sold half of his Canadian Pacific stock after it doubled for him. His broker didn’t object and in fact complimented him on his conservative approach.

Selling half after a double makes sense in a high-risk investment such as a penny mine. In fact, in Power Growth Investor (our investment advisory covering more aggressive investments), we routinely advise selling half of any high-risk investment you own that doubles.

That way, you get back your initial stake. This can give you a clearer perspective on what to do with the other half of your investment. If you are too slow to sell speculative stuff, after all, your profits and even your principal can evaporate all too quickly. But it’s a mistake to apply this rule to a stock like CP Rail.

Finding penny stock gainers through “black box” trading systems just adds an extra layer of risk

Some investors aim to profit with the help of something called a “black box.” This is stock market software that picks stocks or makes other investment decisions, based on historical data. Typically, the software is programmed with algorithms that trigger trades when certain market conditions are met. Individuals sometimes buy these programs over the Internet or from direct-mail advertising.

The typical “black box” sales pitch goes something like this:

• Based on decades of research.
• System makes investment decisions automatically—eliminates human emotion and error. Protects profits during market reversals. Makes money for you while you sleep.
• Great track record. Here’s a standard marketing claim: “Well, simple and to the point: if you back-test a robot and it shows 100% ‘demo’ profit in one month, it should PRODUCE around 80-100% profit in LIVE trading. That’s it … no more and no less!”

Automated systems that make trading decisions for you do two laborious but essentially simple things. First, they narrow down the data you use to make investment decisions. Second, they apply some fixed rule or rules to draw a conclusion or an investment decision from that selection of data.

It’s easy to create software that would have made profitable investments in the past. That’s because the programmer has all the data for the period, and can try various combinations of buying and selling rules to see if they would have worked.

These systems often seem to work for a time, but that’s usually coincidental. If the market is going up and they tell you to buy volatile investments, they may generate a series of profitable trades. Then they quit working, and begin pumping out unprofitable trades. Often this happens just when they can do the most damage to their users.

Our response is: be realistic. Stock market software that costs a few hundred dollars won’t make your fortune. The big profits in black boxes go to those who create and sell them to the public, not to those who buy and use them.

Use caution when you aim for penny stock gainers: the longer you play, the likelier you are to lose

In penny stocks or games of chance, the odds are against you. So, time works against you. The longer or more often you play, the likelier you are to lose.

That’s also why, as mentioned, we think you should apply our sell-half rule.

Use our three-part Successful Investor approach to make better investing decisions

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

What is your opinion on investing in penny stocks to boost your investment worth? Is that a risk you’re comfortable with?