How many times have you missed a big stock move simply because you bought the stock too late? A big press release story comes out, you immediately buy the stock and it goes down. In many cases you hold the stock for a while and it goes down further and you lose big. Unfortunately this happens everyday in the OTCBB market. If you look back at any of our news stories from several days ago you will find that a vast majority of these stocks are trading lower than they were when the stories came out. For those of you new to the OTCBB stock market this kind of event did not happen during the bull market of the late 90s. It was the exact opposite back then. You could buy almost any OTCBB stock with good stories and it would run for days. Fortunes were made. With those times gone, everyone is struggling to learn the best strategy for making money in the current market conditions. Has anyone found one yet?
The reality is, today’s struggling market conditions make it now a stock picker’s market. You need to buy stocks in a carefully and calculated manner, with a short term in and out strategy. Buy as little as possible. If you throw your money to the wind you will likely lose everything. However, if you position yourselves in a few special situations you can still make money.
The first general principle to making money on the OTCBB is to realize that this market is NOT for investors but for traders. Investing in OTCBB companies will only bring you heartache and loss, as most of the companies have little if any fundamental value. What this essentially means is that most of the companies have little or no real asset worth or revenue. Even those companies that do have successful and revenue generating operations (at least according to their SEC filings) seem to dilute the market with their shares.
What is dilution? If you follow most OTCBB stocks over time you will find that the public float and total shares issued and outstanding gets larger and larger. A company may have only 1 million shares in the public float (the public float is the number of shares that are out in the marketplace, freely trading or tradeable) at one particular time. Two months later that float could have increased to 10 million shares. One year later it could have 200 million shares in the public float. Dilution is where the companies issue more shares into the market place over time. So the HOT Company that you saw run from .20 to $25 but then fall again to .20 is NOT the same stock today. It is for all practical purposes a totally different company (as far as the structure of the stock). If the public float has increased dramatically it will never run to that price level again. Forget about it and move on to another company, one with a smaller float.
Dilution has to do with the fact that a company’s shares are like cash for those who hold them. Abuses occur with those companies that give away free shares or issue blocks of stock to people who could care less about the company. Lots of service providers (investor relations firms, investment bankers and the like) could care less about the companies that have hired them and simply dump their free shares into the market place at any time. This causes the public float to get bigger and bigger. Smart companies should SELL the shares to these service providers, maybe at a small discount to the market, not give it to them. If you simply give something of value to someone there is a zero cost basis that threatens to destroy those who had to pay for their stock. Greed can run rampant and the little guy that bought the stock on the open market can get killed. Yes, dilution is a necessary evil for tiny companies that are growing and are desperately attempting to attract and secure whatever market they are trying to capture for their service or product. Dilution is necessary because these companies are cash strapped. But this is often taken to an extreme, with many companies issuing a bunch of stock into the market place yet NEVER successfully getting their product or service off the ground.
Many OTCBB of companies simply end up filing bankruptcy or shut down the doors long AFTER they unloaded all of their shares into the marketplace. Others continue operating using the notorious reverse stock split (artificially decreasing the number of shares that are in the marketplace in an attempt to make the stock buying sensitive like it was when the company first started before dilution). After a reverse split has taken place, the companies are free to simply dilute the stock all over again. This is in total disregard for small investors who bought on the open market. Those investors who paid for their stock on the open market and who hold the stock through the duration of such fiascos are left holding an empty bag. This past year we have seen lots of companies do reverse splits more than once. In my opinion, this practice is nothing more than abuse of a country and beautiful economic system that is designed to help companies raise capital to bring their products and services to market. The public pays a heavy price for such scams.
Trading is a different story. Trading is truly the KEY to making money on the OTCBB. A trader does not invest in a company but rather looks for a situation to get in and out of very quickly. A skilled OTCBB trader will get in and out of a stock to make a quick buck. He takes no prisoners. Sometimes he is in the stock for minutes, sometimes hours, and sometimes a few days. A successful OTCBB trader knows that the longer he is in a stock the more likely he will lose money. He doesn’t care what the company does. If all the company does is sell apples and oranges, a skilled trader could make money trading the stock. A trader simply buys it low, before others buy it, and then gets out during a run up. Yes he runs the risk of losing like everyone else if the stock never goes up. But if the company can successfully attract investors to buy the stock the trader can make a fortune. I have seen it happen literally overnight.
This simple trading strategy of buying low and selling high does run contrary to the grain, as everyday companies put out glowing press releases about how good they are doing, the great contracts they have signed, important letters of intent, big acquisitions, successful financing, etc. The press releases are written as if they are trying to attract long-term investors. It almost seems like the companies really want long-term investors. Yet is is often amazing how quickly the stocks seem to fall after these kinds of press release stories come out. Why? Dilution works against the stock and at this time in the stock market there are typically more people selling a stock than buying it. So this puts pressure on a stock and it heads toward zero.
Some companies even hire so-called “analysts” to put out recommendations on the stocks. Keep in mind there are no real Wall Street analysts for OTCBB stocks. Yes there are hired guns that claim to be analysts. But always read the fine print, as you will find 9 times out of 10 that these people have simply been hired to tout a stock. Professional Wall Street knows about the OTCBB world and its problems and that is why they generally ignore it. Have you ever wondered why the Wall Street Journal, CNBC, and others rarely cover OTCBB stocks? Because they know about the things I have just told you.
We received a letter from someone several weeks ago who claimed to be a “large, long-term shareholder” in a company. He was whining about one of our news stories and our timing in releasing the news. He must have been an insider, as we cannot think of anyone who would be foolish enough to buy a big block of stock in an OTCBB company and hold it as a long-term investor. You don’t do that with OTCBB stocks unless you want to lose all of your money. You can be a big investor, long term, in mutual funds, real companies on large exchanges, and the like. Not with OTCBB stocks. Only a fool would do that. A fool and his money.