I recently warned my Bob Livingston Alerts readers about the benefits and dangers of penny stocks, and my warnings are coming to fruition in a form you may have heard a lot about recently: the initial coin offering, or ICO.
More than $3 billion has been raised for various cryptocurrencies via ICOs so far this year. Investors are interested in anything that has the word “blockchain” or “coin” in it. But buying in to something when it costs mere pennies can wipe out your investment through many of the same old problems that have plagued penny stocks.
Understanding what you are dealing with regarding very inexpensive investments of this type is vital to holding on to your money and growing it. That’s why I want to make sure you see the warning and advice I sent, which apply even more so than just a few days ago:
On Dec. 23, 2013, I bought 10,000 shares of Barkerville Gold, symbol BGM/V at 40 cents.
Most would say that this was a crap shoot, and it is.
But my study indicated potential. So far, I certainly haven’t lost money. Shares rose as high as $1.26 a share in May of this year, after staying right around the price I paid for them until March.
That’s a 215% gain in less than two months.
Before you say, "Ho ho ho, Bob, Merry Christmas three years later!" you should know the price has dipped to around .73 a share as I write this. Have I sold? No. It’s still up 82%, and I hope it will go even higher during its next run up.
Barkerville’s mines are in the Golden Triangle of British Columbia, Canada, an area of intense prospecting, discoveries and dealmaking in the precious metals space.
In fact as the price has dropped, the technical indicator ADX, or Average Directional Index, has jumped over 40 for the last few days. This indicates a possible uptrend. So I might buy more shares before they’re on the way up again.
I sincerely hope that you are loaded with silver and gold in your possession as well as gold stocks, and that you have the certificates in your possession. But I am writing to you today not because I want you to buy shares in Barkerville.
What I want to do, after looking in on this particular investment, is give you some advice on how to differentiate a legitimate penny stock from a pump-and-dump scheme.
The first thing you should know was said very well by Money Morning’s small-cap specialist Sid Riggs. He says that as you search for safe penny stocks to buy, "you want to make sure the firm’s CEO and top executives aren’t trying to scam investors. That’s why you must always check out the ‘Executive Compensation’ section of the tax filing when doing your research."
Use this tip to identify safe penny stocks
"The 10-K is a report submitted to the SEC every year that tells you everything you need to know about a company. It outlines financials like profit, earnings and revenue, among other things.
"But the most important info for penny stock research is the "Executive Compensation" section typically found in Part III of the report. This is where you can see how the CEO and top managers are paid each year. It’ll disclose whether they’re compensated in stock options or cash."
Barkerville is a Canadian company, so in its case you would look into the form 51-102F6 Statement of Executive Compensation. If you were looking into Barkerville today, you would find that an investment group including Osisko Gold, which is a royalties company, and many Barkerville directors and officers, recently bought 25,000,000 shares. That means the people on the inside expect the company to produce results for years to come.
But back to Riggs: "The safest penny stocks to buy are the ones whose CEOs are paid mostly or entirely in options. When they own shares of the company’s stock, it shows they’re committed to the firm’s long-term success. Owning options means the execs want the company to be successful so those options grow in value over time.
"Conversely, if you see the executives are being paid in cash, it’s a sign the penny stock isn’t worth your investment. Cash-only compensation indicates the firm’s leaders aren’t invested in the firm’s long-term health. They may be trying to earn as much money from the company as possible before the stock falls to $0 and it goes bankrupt."
Like shares of a prescription-drug distributor that one pump-and-dump schemer touted back in 2012, before he was arrested in 2014 driving his Bugatti Veryon paid for with investors’ money. The price ballooned by more than $700 million within two months as alerts were sent to investors. After the touting stopped, the shares collapsed and all investments were wiped out.
In order to avoid losing your penny stock investment, stick with the companies that trade over $1. I took a chance on Barkerville because it once traded at over $30 a share and has potential to get back there.
Stocks under $1 are enticing because of their gain potential — but they rarely pay off. Investing in most of them is gambling, not investing.
For example, trip zero stocks are priced with three zeros. These are stocks priced between .0001 and .0009 per share. That’s fractions of a penny. These are ripe for manipulators since each increment the stock goes up is a 100% move versus the entry price of .0001. Almost any alert you see will cause a move that will primarily benefit the people who first bought the stock, not you.
If you do invest in companies that trade for less than $1 a share, make sure it’s not money you will miss if it disappears, or that you don’t need if the stock trades sideways for a long time.
If you do your research, you will find most of the real companies, with real products, and not shell companies trying to pose as legitimate, are in the over $1 area. These will mostly be listed on an exchange, and not traded over the counter.
Companies trading their shares on the OTC (over the counter) market don’t have as many regulations on their stocks as the companies listed on the NASDAQ and NYSE, so they are more susceptible to fraud.
The penny stocks you’re looking for should all have liquidity. If you are trying to buy $10,000 worth of shares in a company where the average trade is $185 a day, you will not find a lot of takers for your money. Same with trying to sell thousands of dollars’ worth. You want to make sure that even if they are under $1, you will be able to enter and exit trades for your shares easily.
A few other rules if you want to keep your shirt while investing in penny stocks or even very inexpensive shares of early stage companies:
- Don’t invest in something pre-revenue — in other words, there are no real products, services, or revenue-generating assets.
- Don’t invest in a "service" that doesn’t have contracts.
- Only invest if there are hard assets attached to the business, and it operates within the law.
Also, I never buy penny stocks thinking they will shoot up. It took years for my Barkerville shares to increase. I have long done the same thing you’ve probably read that Warren Buffett advises doing — I buy good companies with real potential whose products and services I understand.
Editor, Personal Liberty Digest®
Editor, The Bob Livingston Letter™
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