Penny Stocks Can Make You Rich
The equity market is diverse and could be taken exposure to by investors following different investment strategies. Investors in penny stocks have raked in sizable returns at times but Geyatee Deshpande however warns penny stocks are not for everyone…read on!
Want to become rich – quick, BUY PENNY STOCKS!: This is a perception that a lot of investors still carry with them. Investors are not to be blamed for such a perception; after all, penny stocks do tend to surprise on several occasions- often positively. A look at the stock price performance since the corporate tax cut was announced in September 2019 and one might conclude investing in penny stocks is the best way to garner quick returns. Remember the focus is quick returns here. Says Amit Chug, who has been a successful penny stock investor over the years, “When it comes to quick returns- the answer has to be penny stocks. I do not think I have ever held on to penny stocks for more than a year. The thing with penny stock investing is that you need to over-diversify and I believe in creating an equal weightage portfolio of penny stocks. Definitely penny stocks investing is not advisable for all. If investing is a mix of art and science, penny stock investing is more of an art than science. One needs to master the art of contrarian investing to be a successful penny stocks investors”. While penny stocks can turn out to be the fastest wealth creators for investors, the success mantra for such investing style is yet to be decoded. The element of uncertainty is unreasonably high in penny stocks and hence investing in them is not for risk averse investors. It should be noted that a maximum people that participate in the market are risk averse. So, it is safe to opine that penny stocks are not for most investors.
How have penny stocks performed : -
If we look at the data for penny stocks for the last seven to eight years, we find that on an average, we have 500-odd penny stocks available in the listed space in any given year. On an average, the returns generated by all the penny stocks put together is 39 per cent in one year if we consider the average data for the past eight years. Almost 259 stocks on an average have delivered positive returns and nearly 75 stocks have more than doubled in less than one year, considering the last eight year data. If we talk in percentage terms, we find that almost 50 per cent of the penny stocks have managed to close in the green over the last eight years time frame for one year period. Nearly 14 per cent of the penny stocks have managed to generate more than 100 per cent returns in the past one year if we consider the average data for last eight years.
The observation is for all listed penny stocks in general. However, if we focus on only those penny stocks that enjoy market cap greater than Rs.100 crore, we find that the average performance of penny stocks tends to improve substantially.
The moment we put a quality filter for penny stocks, we start getting better results. If we consider only those listed penny stocks with market cap greater than Rs.100 crore (for the last 8 years) we find that on an average we have to deal with 58 penny stocks out of which 40 stocks have managed to close in the green over a 1-year time frame while 18 stocks have managed to more than double in the last one year time frame. If we look at the numbers in percentage terms we can say that nearly 69 per cent of penny stocks with market capitalisation greater than Rs.100 crore manage to close in the green while an impressive 31 per cent of the total penny stocks falling in the category of Rs.100 crore market cap have more than doubled in the last one year time frame.
Thus by simply adding the filter of market cap we find that the proportion of positive closing stocks jumps from 50 per cent to 70 per cent while that of the stocks that more than double jumps from 14 per cent to 31 per cent.
Conclusion :-
No investment advisor will recommend buying or creating a portfolio of penny stocks simply because it is impossible to predict which penny stock can do better and come out as a winner. The irony with penny stock investing is that identifying winners among the lot needs superior due diligence and fundamental analysis skills while the reality is that mostly inexperienced investors participate in penny stocks investing.
What lures investors towards penny stocks is huge swings and quick – large returns. However, most investors end up incurring losses. The experience of most investors suggests that the end result is quite opposite to what investors initially think the experience would be. Indeed, most investors have experienced their savings being wiped out in the blink of an eye for chasing penny stocks.
There is no doubt that the bid/ask spread is high for penny stocks and these set of stocks are extremely illiquid, which makes it difficult for investors to enter and exit penny stocks. Thus, penny stock investing is extremely risky even for experienced investors. In fact mature investors have stayed away from penny stock investing.
Penny stock investing is for rare of the rare breed of investors who have accurate assessment of their risk profile and are masters at contrarian investing. Investors whose strength is reading balance sheets and understanding cash flow statements and profitability can definitely shoulder push ugly penny stocks and focus on better quality penny stocks in the basket.
Contrary to the myth, more efforts and skill sets are required to identify opportunities in penny stock investing strategy. The underlying business still needs to be studied before investing in them.
Invest in penny stocks if you know the inherent risks and if you have adequate skills to identify quality in the space. The rewards will be all yours if a methodical portfolio approach is taken while investing in penny stocks.