Archie's Corner

[Archangel]

The OTCBB Roller Coaster

By Daryn Fleming

Published by OTCBB News Network

07/03/2001

The OTCBB stock market is a lot like a roller coaster ride at an amusement park. The stocks seem to trade on no rhyme or reason. The SEC changes that have required OTCBB listed companies to file regular reports seems to have had little or no effect on how the market itself behaves. The stocks seem to have a mind of their own, trading in patterns that are totally unrelated to earnings, revenues, and other fundamentals. To make money on the OTCBB you have to quickly get in and out of a stock. The letters we get everyday lead us to believe that a lot investors do not understand this. They seem to be puzzled by the fact that a stock doesn’t go up and stay up. Sure there are some stocks you can buy and hold, but these are few and far between. Why are a vast majority of the stocks on the OTCBB so volatile (moving dramatically up and down)? The answer lies in the nature of the OTCBB and the companies.

What is the OTCBB? The OTCBB is not really a stock exchange. It is rather an electronic bulletin board featuring over-the-counter stocks (OTC companies are those with stock issues that are not listed on any major stock exchange like New York Stock Exchange, American Stock Exchange, or Boston Stock Exchange). OTCBB stands for Over-The-Counter-Bulletin Board. It is essentially a computer network owned and operated by the NASD (National Association of Securities Dealers-- the same organization that runs NASDAQ). OTCBB Market Makers quote the stocks and post the best bid (the price that market makers will pay for a stock) and ask (the price that market makers will sell a stock for) prices on the system. The OTCBB has been around since the early 1990s.

Most companies that list their shares on the OTCBB are young developmental stage companies, struggling to capture a portion of a market in whatever industry they are involved in. Some of them are failed companies from larger, more prestigious exchanges like NASDAQ, NYSE, or AMEX. Many OTCBB companies have minimal assets and no revenue or earnings. Lots of them have little or no money. So the fundamental-based formulas (like debt/income ratio, price/earnings, etc.) that investment books and experts talk about in the mainstream press simply do not apply to most OTCBB companies. So you have to discard stock analysis based on fundamentals. For the most part, OTCBB stocks are priced not based on present or future earnings but current supply and demand of the stock in an electronic auction process. What about technical analysis (charting stock prices and attempting to predict future prices)? Charting is probably a better indicator than fundamentals. Experts claim charts work 70% of the time. But charting is an inexact science, and seems to work for anything from stocks to betting at the casino. Charts are best used as a research tool to provide insight rather than predict.

One of the major problems of the OTCBB has to do with information. A vast majority of the information about the stocks comes from PR firms. While these sources are valuable, they are extremely biased because they have a financial interest in the stock. Most PR firms present the stocks to the public as if they are long term investments, using the same kind of language that is typical in Wall Street circles (as you will soon discover, the OTCBB is not for long term investing). Yet these PR firms are good starting points because OTCBB stocks do not get the attention of the mainstream press. So most of the time we would never hear about the companies if it weren’t for the PR firm.

Another source of information are the internet message boards. They are absolutely not a reliable source for information, with “bashers” and “pumpers” (terms given to investors who are quite vocal in their support for or against a company) and other anonymous characters with questionable loyalties that you certainly would not want to put faith in for your hard earned investment dollars.

Unlike the stocks that are listed on the larger exchanges on Wall Street, OTCBB companies typically have no coverage by analysts. The OTCBB News Network plays a valuable role in the process through its attempt at independent news coverage and analysis. It is very difficult to find good OTCBB stocks without a reliable news source (see News vs. PR: Where Do You Get Your OTCBB News From?).

The bottom line is that the OTCBB is best suited not for long term investing but rather for trading (short term investing). Investors who successfully make money on the OTCBB are those who buy the stocks and resell them very quickly for a profit. OTCBB investors can be broken down into different categories: Day-traders, very short-term traders, short-term traders, and long-term traders.

By strict definition, day trading is where you buy and sell a stock on the same day, attempting to capitalize on intra-day price moves. Very short term trading is where investors buy a stock and hold for a couple of days, capitalizing on the upward momentum movement of a stock price and then selling out for a higher return. Whether day trading is better than very short term trading is debatable. Sometimes very short term traders will do better than day-traders because a stock that is moving higher will sometimes continue over the course of a few days. But there will be lots of stocks that crash the day after a run, meaning that the day trader was actually much better off because he sealed in his profit right away.

Other investors will buy a stock and hold for a couple of months, believing that a stock will trade much higher than its current trading range in a couple of months. When they reach their target they sell out. Some of these investors are those that failed in a day or very short-term trade and got stuck in the stock at a level too low to sell without sealing in unacceptable losses. Sometimes these short-term investors actually become long-term investors because it takes months or even years for the stock to move up.

Based upon my analysis from trading for many years, I have come to the conclusion that long term investing is not the way to go with stocks on the OTCBB. Those who choose to go long term on OTCBB stocks are sadly risking everything because very few stocks actually increase in value over the long haul. The reality is, most OTCBB stocks will not be the next Microsoft. It is the long-term investors who are left holding the bag after a stock spikes and then comes crashing down. Long-term investing is best left for mutual funds or large stocks that produce regular and predictable earnings, year after year. It is not suitable for the OTCBB except in some of the more expensive issues like the banks or other solid performers who qualify for a larger stock exchange but choose to remain on the OTCBB for whatever reason. But if you invest in one of these stocks for the long haul you better do your research and make absolutely sure the Company is solid.

Primarily short-term investors trade the OTCBB. This is one reason why the stocks fluctuate so wildly. Do not fall in love with OTCBB companies. If you are truly passionate about a company you would be surprised how much cheaper most of them will be at a later date. When one stock is finished running there will be many other similar opportunities. The reality is most OTCBB stocks eventually go to zero or close to it. Nevertheless, most of these stocks will have trips up and down throughout their trading life, providing many opportunities to make 100% or more profits. The very volatility of the market is what makes the OTCBB so attractive. It is your best bet to quickly get in on the low side and out on the up side of the OTCBB roller coaster.




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