Tags: Hoenig | penny | stock | risk

Capitalist Pig's Hoenig: Penny Stocks Are for 'Suckers'

By    |   Monday, 21 April 2014 01:17 PM

Penny stocks are "completely a sucker's game" and it defies logic that savvy individuals buy into such "value traps," says Jonathan Hoenig of Capitalist Pig.

Despite the moniker, penny stocks are usually considered any stocks that are priced under $5. And they are often touted as a means, albeit a risky one, for investors with limited capital to access a lot of shares and potentially score big if their stock picks move up.

It's a storyline investors shouldn't buy into, Hoenig told Yahoo.

Editor's Note:
18.79% Annual Returns ... for Life?

Cheap stocks are cheap for a reason, and people buy them for the wrong reasons, he noted.

"Maybe it's an ego trip or something, but people love the idea of owning 10,000 shares of a terrible $2 or $3 stock," Hoenig maintained.

People overlook strong stocks because the shares are expensive and they go after penny stocks simply because they are cheap. But what these investors may fail to realize is cheap stocks almost always get cheaper, he added.

"Investing is a probability game" and investors should avoid low probability bets, Hoenig advised, noting that cheap stocks are usually in that category.

Many people look at the low price tag for penny stocks and they consider the possibilities of a 5-cent pop or a 50-cent pop. But adding pennies to the pot is not what investing is all about, he argued.

Instead, investors should be putting their money into strong companies with real long-term growth potential and the potential for substantial price moves.

Don't look at price, Hoenig proclaimed. Instead, look at strength, weakness and market capitalization. That tells you a lot more about a company than price.

And remember, weak stocks, which almost all penny stocks are, "always tend to get weaker," he stated.

But not everyone believes that stereotyping stocks by their low price is sound advice.

Don't draw conclusions about a stock based on its share price or market cap, Jordan Terry, founder and managing director of Stone Street, wrote in an article for Forbes.

Investors should not fear all penny stocks. Yes, penny stocks can be risky, Terry noted, but he explained that the risks could be addressed by analyzing penny stocks the same as larger companies.

That is how investors should determine whether cheap stocks are worth their investment dollars, he said.

"Don't judge a book by its cover," Terry wrote.

"Most people don't have a clue about investing, even some professionals, so beware word of mouth 'advice,' and always do your diligence," he added.

Editor's Note: 18.79% Annual Returns ... for Life?

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InvestingAnalysis
Penny stocks are "completely a sucker's game" and it defies logic that savvy individuals buy into such "value traps," says Jonathan Hoenig of Capitalist Pig.
Hoenig, penny, stock, risk
431
2014-17-21
Monday, 21 April 2014 01:17 PM
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