Getting Rich On Penny Stocks ?

Penny stock fever is in the air.

Being fortunate to be acquainted with some people who actually make a livelihood trading in penny stocks in an amateur capacity, I sat down with a few of them to glean more on their trading, not to be confused with investment, strategy.

The Uncle Strategy

I call this the Uncle strategy because it is common amongst a certain group of investors I typically call Uncle, not by relation.

This is quite a simple strategy that hinges mainly on network effectiveness. Stocks are identified by surges in volumes, checking the most active traded list and the up and coming on the traded  list.

Calls are made to friends if they have heard anything. Returns of “can buy” and target price are most helpful and the word would spread. For those who are too lazy or busy to check for stocks, they usually have a friend who is not and this is good for the network. Ideally, they would have an informant on the activities of the Big Players.

Success rate 50% but loss management is most important especially if the stock is in a pullback and liquidity dries up.

The Big Players aka The Influencers

Little known about them and they like to lie low. They buy via their own accounts and sometimes through proxies, if they do not want their names to be known.

These are powerful influencers of the market, some of which eventually became household names in the marketplace calling themselves private investors who go on to do big things !

The Big Players sometimes do not know each other. They do keep tabs on the activities in the market before making their big decisions which are market moving events. 1 trade and volume would spike, getting market attention. Some followers will jump into the bandwagon and we have a rally in our hands.

The confidence building part is important in the rally, the Big Players know. More buying would occur for the retail folks to sit up and the waves would continue till their price target is achieved before they sell out, usually at a huge profit for the market cannot accomodate their volumes and they need to build ample price buffers for themselves.

The success rate is high especially if smaller companies are targeted for it would not work on on blue chips with huge market caps that are widely followed by the professional investors in funds etc. My own understanding is that it does not take much to create a market move, just 20 million for a small/medium company of perhaps 300 million market cap.

Biggest beneficiaries of the Big Players are their favourite brokers and proxies who would have first hand information on their activities and may tag along for a mini windfall.

The Towkay Club

Now the Towkay Club is the pinnacle of success. Here the profits are almost guaranteed.

It appears simple. List a company, sell shares. Acquire assets, sell shares or bonds.

Where does the profit come from ?

From the very little I understand, it is wealth materialisation. A scaled down version of Li Ka Shing, I suppose.

You buy an asset for 10 dollars, list it at 100 dollars and you earn 90. Same thing for acquisitions of other companies and others acquisition of yours. I understand that the Straits Times published an expose on cross company ownership yesterday but have yet to get my hands on that article.

I suppose that some members of the Towkay club also fall into the Big Player category in a personal capacity but have been unable to get a better understanding of the local situation. It is just like the joke that some owners of small listed companies treat the place like a personal hedge fund.

Singapore

Someone mentioned to me, which I cannot verify, that companies usually list in Singapore as a last resort, except if they are Singaporean companies.

Whilst we have garnered the inadvertent title of being a junk bond market, I would hesitate to suggest that we are a junk stock market as well.

Market volumes are an important part business and all manners of trading should be encouraged in the name of free markets.

Where did Blumont go wrong then ?

I would expect it is punters greed that drove it to the improbable and almost nonsensical PE ratio in that short period of time that got it into trouble. And the dump fest was allegedly sparked by rumours of some punters who had turned short.

Yet we do need these little wake up calls now and then in the market, especially one which is overheating like ours.

Sympathies to all those affected by the Blumont debacle. The independent brokers who underwrote purchases for their clients who did not pay; the investors who had bought their share placement at 1.70; and all the people out there who bought it for a quick buck.

Good luck !!