Your greed to make it all in one shot will likely fail every time!

Each year that goes by we can stop and look at where we were and now it’s easy to see what the smart money was investing in.  You have to wonder if you know what to look for in these economically challenging times. There was a time when people blindly handed money over to mining companies in hopes that they would find something while digging in the middle of nowhere. As well we tend to get caught up in what someone tells us is an emerging trend and an entry point to something huge. It’s easy to get caught in the hype and excitement but make sure the basics of your investment have a strong possibility of success. How do you do that?

I look for previous attempts at success if the company insiders have proven business plans that worked out well in the past even if the sector they were in before is unrelated. If I can’t find that then I look at each insider (Director, CEO, VP, etc) and see if they have had a track record of hitting the right product at the right time. Often it seems we have nothing to follow other than a lot of promises and some fancy charts that are supposed to guide us into opening up our wallets and participating in the latest round of financing.

I like to actively go to stock bullboards and chat with investors about their prospects and their market experience. I was surprised to learn how accredited investors are a small part of the everyday chatter and stock promotion on the boards.  These boards have now become an avenue for small investors to try to lure others into the story and push up the share price. This does not mean it’s a pump and dump in most cases, however, an attempt at sharing the risk with others and trying to accelerate the growth that the small retail investor thought he would see. A lot of companies do not promote their own stock. They plug away and hope that they will hit on all their milestones and that alone will open the flood gates of buyers who will eat up all the open market shares. In a perfect world that would be true. We now have IR firms and paid promotion electronic media that will attempt to drive traders to at least look at your stock. This has its benefits but along with adding to liquidity it also creates momentary momentum that day traders look for to make a quick dollar for the day.  I find junior investors rely on these types of IR firms for their leads because they don’t know where to look.

I follow some basic rules that I have often written about to dig for bargains and some of them cross over skills used by technical analysts. I look for small float companies with cash in the bank. I look for historical data on the existing property if it’s a mining company. I also look at market demand if its REE or Potash because these two markets can swing and sometimes be influenced by how China wants to play with certain sectors each year. I also look inside the company and who is running the company and supporting it. Some CEO’s have a very bad track record and merely do a new start up company every few years. So I keep my own list of certain CEO’s who I feel do nothing with their companies other than do private placements and reverse splits.

I always check the day’s most active issues on the TSX, TSX-V and the Nasdaq and track who is moving up slowly on no news. That’s a good place to look for companies who may have a trend reversal starting or a pending move on news. It’s amazing how many companies will suddenly appear from out of nowhere and be the volume leader each day all week with a slight gain. Further investigation shows they are starting to drill a very hot area and that the company has some majors in the area watching their progress. The big stories can seem to come from out of left field but some key players identified them a month ago but you weren’t looking. There are no big surprises. No one can keep a huge story that quiet that there isn’t some market reaction. Pure speculation will not drive a stock price that much.

I also calculate how much the recent run has cost investors. For example if a stock is trading millions of shares and its green a couple days this week; it might not mean anything if the stock is under 5 cents a share. It doesn’t take very deep pockets to move some penny stocks. I keep a list of the active stocks that have popped up on my radar and once I see a pattern I then take a position after doing all my due diligence on the company, its product and its track record. All the information you need is there you just need to know where to look.

Lots of companies will blame short sellers for their weak share price but that’s a typical excuse and short sellers don’t account for a lack of sales or profits. Everyone feels they have a business plan that will turn into profit in short order. The reality is the time lines are always off and the company knows they need to hold investors attention to retain any gains. Investors who say they are long usually mean weeks these days, not months or years. I am guilty of this as well. If someone pitches me they will have a product to market in six months yet they start adjusting over and over while the cash dwindles away it may be time to move on. Almost every sector has juniors that burn through cash while trying to prove what they have and until some success is proven it’s all very high risk. I tend to get involved once certain milestones are hit. Getting in early could pay off but if you’re investing purely on faith you will likely lose some or all of your investment.

Each year that goes by we should all look back and learn from our mistakes and rejoice in the success of knowing when to take profit. Junior investors not only buy bad stocks but more often buy into winners and forget to sell on good gains. Sometimes profits are there and greed tricks you into waiting it out for that huge payday that never comes. Don’t expect to retire off of one investment. Some traders may make a million or more a year while others plug away and make a million after 20 years. If you look at reasonable gains within reasonable time lines you will sleep better at night and watch your wealth creep up slowly. This is no different than the get rich quick schemes you hear about on the news. Your greed to make it all in one shot will likely fail every time. There are no shortcuts to success other than the lottery.