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The secret to buying small shares at a discount – and selling them at a premium…

by Francois Joubert

Tucked away in a little-explored corner of the JSE is a hundred or more little known small companies.

History has proven these stocks, known as penny stocks, are able to offer investors the biggest gains  on the stock market over extended periods of time.

There are many ways to identify the penny stocks with the profit potential.

One of the things I look at is something I’ve termed the ‘Small Cap Effect’.

In short it’s a particular pattern I’ve identified that shows you good entry and exit points on small cap and penny shares…

In fact, it’s this pattern I used to identify Conduit Capital as a buy in March 2015 – making a return of 129% from it by November 2015.

And it is this same pattern that prompted me to sell Conduit Capital in November 2015 at 370c. Today the share has dropped back to 275c.

Today I’d like to share this pattern with you – and show you how you can use it to get in and out on shares at the best possible prices!

The “Small Cap Effect” explained

Whenever I tip a share investors expect it to rise in a straight line from the day it’s tipped to my target price.

But even when I am right and the share hits my target price it doesn’t move in a straight line at all. In fact it tends to head up, drop down a bit, move sideways and then suddenly spike.

This is because of the low liquidity in penny shares. And it speaks to a cycle they follow that I call the “Small Cap Effect”.

Let me show you:

Small cap shares tend to move when there’s news. In this example you’ll see how the share price shoots up when a trading statement is released and then increase even more when results are released. Then there’s a period of ‘No news’.

During this time the share price dwindles and either goes sideways or slowly drops.

This happens as less and less attention is focused on

the share and there aren’t many people buying or selling it.

Red-Hot-March-2016_1-7Then a new trading statement and results release confirm growth for the company and the share price shoots up again.

On the flipside – if you’re looking to sell a share the best time to sell is typically a month or two following the big gain after a news update.

After that the share tapers downward – ready for a buying opportunity again.

So here’s what you need to do for optimal short term gains:

  1. If you expect outperformance from a share, buy a month or two BEFORE results are released.
  2. If you want to add more shares to a position – wait for a month or two AFTER a results release to buy as the share pulls back on a lack of news flow.
  3. When you want to sell at a decent level do it shortly following a results release.

Remember: Even though this is a real life example and I can show you ten others like it, it doesn’t mean this strategy always works nor that you should use it exclusively.

It works well as part of a successful investment strategy – and can help you time entries and exits better!


Are penny stocks a safer investment than property?

by Francois Joubert

Francois Joubert is South Africa’s most popular penny share expert. You may know him from TV as the editor behind the Red Hot Penny Shares phenomenon.

If you think about penny stocks, you probably think about the risk.

But the truth is, penny stocks are only risky if you buy the wrong stocks for the wring reasons.

If you only buy penny stocks that have strong underlying fundamentals, you greatly alter the odds of investment success in your favour.

In fact, history has shown that, over the last 10 years, as an asset class, penny shares have outperformed not only the JSE’s Top 40 stocks, but the property market as well!

Who would have thought?

Three fatal mistakes penny share investors make

by Francois Joubert

We’re all looking for that R5,000 investment to go to R50,000 or more.

There truly is nothing more exciting than seeing your investment account double, then double again and again. And if it’s all in a short span of time evenbetter…

But, there are a number of mistakes penny share investors make that will see them never achieve these kinds of investment results. In fact these mistakes could see them lose BIG money!

Fatal Mistake #1 – Assuming that if a stock price is low, it’s good to buy

I’ve often heard investors ask me about buying this or that 5c share. But more often than not my answer is AVOID.

You might think the secret is to “Buy low, sell high”, right? Well, sometimes. But, just because a share price is low, doesn’t mean it’s a good buy. And, conversely, just because the price is high, doesn’t mean it’s a bad buy. The mistake is not knowing that “buy low; sell high” is really shorthand for “buy stocks that are undervalued and sell stocks that are overvalued.”

What to do instead: High and low are relative terms – R300 may seem like too much for a stock, whereas R3 might seem like a bargain. But you have to put the trade in context. Ask yourself if the company is under- or overvalued at its present price, based on P/E, Asset Value etc. That’s the mark of a good or bad buy.

Fatal Mistake #2 – Going “All-in” on a penny stock

Penny stocks have the potential to QUICKLY double your money. In the last two years alone I’ve had three shares make me more than 200% each!

Now, this is where many investors start taking unnecessary risks. They invest all or most of their cash into a single share.

Going “all-in” in on a penny stock carries serious health consequences…  While a big gain could help you make money much fast a loss will see the value of your investments crash to worthless overnight!

What to do instead: Only invest a sensible amount of money into these shares. I always ask investors how much money they are prepared to lose without having sleepless nights. That’s how much they should be investing into each share. Not a cent more.

Fatal Mistake #3 – Ignoring liquidity

So you’ve got a lot of cash to invest. You’re not shy of taking risk. You decide to buy R200,000 in a single penny share.

As you buy this your broker tells you that the best price he can get you is 10% above the current market price, but you REALLY want to buy this share, so you do it…

The problem is, you’ve just bought into an illiquid penny stock. On a good day it usually trades R150,000. Now you’ve gone and bought more than that all in one go.

I can tell you now, when it comes to selling this share you will struggle. You’ll have to be prepared to take whatever price the market gives you, which will be lower than you could’ve got if you bought less shares…

Not only can making this mistake eat into your profits,it will also make all your losses bigger!

What to do instead: Follow my rule of thumb and never buy more than 10% of a share’s daily value traded. That way you’ll always be able to buy and sell your shares for a fair price.

Make money by avoiding these and other mistakes

The truth is that all investors make mistakes with their money. But what separates the winners from the losers are the ones who can apply what they’ve learned.

There’s no greater mistake than not learning from your mistakes.

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