Readers Respond: Investing in Stocks of Various Price Levels

An email from David regarding investments in stocks trading at various price levels:

As a separate, but interesting aside, I'm curious as to your record
of success with various price levels of stocks; for example, do you
find more success in the $1 to $5 range, or in the .10 to $1 range,
or in the under .01 range? Is there a difference in the percentage
of winners among your picks in these respective ranges?

VFC's Take: This was a pretty good questions so I split David's email into two different posts.

In order to properly respond, let me first clarify my position on what I consider to be a 'penny stock'. In VFC's House, a penny stock is a stock that currently trades and has historically traded for sub-$.01. However, I don't consider penny stocks to be stocks that had previously traded for respectable levels and got beaten down to about a penny as a result of bad news or a market crash (TTNP, MHAN). I know that is not the broadly recognized definition of a 'penny stock', but the term can be misleading because most of those that trade sub-penny stocks do so strictly for trading purposes. That's a different game than finding a TTNP or MHAN that trades for about two cents but is still largely a news-driven stock.

For all intents of purposes, I don't mess around with 'penny stocks,' meaning if it trades for below a penny, it's not my game.

However, I've had the most success with stocks that trade for between one and five cents, only because a small investor can load up on those stocks - if you find one with potential - and come out HUGE if the stock makes it. For instance, Celsius Holdings (CSUH) and Titan Pharmaceuticals (TTNP), both of which I loaded up on at sub five cents, instantly became the largest two positions in my portfolio during their respective runs earlier this year - even after I sold off some profit - but before the huge percentage gains they were far from my top holdings. Manhattan Pharmaceuticals (MHAN) and BioElectronics, while not yet posting the gains of TTNP and CSUH, still had my portfolio way in the green because - while each only posted about a six cent gain - it was still a triple in price from where I had purchased each stock.

How long is a small investor going to sit around and wait for their investment in Microsoft (MSFT) to triple, let alone post the 3000% gains of TTNP?

Don't get me wrong, you need the stable stocks in your portfolio for the long term and for the kids' education and the such, but the majority of the 'night on the town' money should go to finding stocks that have potential that are still trading under the radar. That's where, in my opinion, the biggest gains can be had and it just so happens that in my portfolio, the biggest gainers (and now some of the biggest holdings - profit taking aside) are the stocks that I had purchased for between one and five cents.

Next - and keep in mind this is strictly referring to my own portfolio - I've had pretty good success in the twenty-to-fifty cent range. I loaded up on AGEN, CVM, EPCT, etc. while the market had those stocks trading at or near twenty cents. While EPCT has not yet reached the dollar mark, the other two are more than doubles, if not triples for me this year - however, since I still like the long term prospects of both I'm 'averaging up', but by no means am I buying now at the rate I was when these stocks were twenty cent stocks.

My logic in accumulating speculative stocks is this, keep in mind this is during what I term 'accumulation phase', barring any news & even driven price moves: The higher the stock rises, the more risky the buy. The lower the stock goes, the more I'll pick up the accumulation (average down). Common sense. However, the strategy will vary after either good or bad news is released.

Another item to note is that when these low priced stocks start to pay off, it's imperative to take profits and/or start trading a few shares because just as easily as they go up, they can go back down.

I like the stable, higher-priced stocks for my IRA and kids' education funds so that I know there's money there when I need it. Whenever my 'night on the town' money pays off, I always transfer some of it into the stable stuff so I don't have everything in the gut-wrenching speculative plays. I even have a few ETFs that I invest in, but I'm not a fan of mutual funds - although one or two of my IRAs that i do not personally manage use them.

Additionally, I think that which stocks you invest in has a lot to do with how much time you have to research stocks and then keep an eye on them so you can buy and sell as need be. These low priced stocks are highly volatile and you've got to be in a position to be able to spot news releases and then to buy and sell quickly enough to make the risk and the stress of investing in those stocks worth it.

I also don't recommend these highly speculative plays for those that have weak stomachs and little tolerance for risk. You've got to have the cast-iron cajones sometimes to watch a stock drop 50% overnight and then make a rational decision as to whether it is just a better buying point or if it's bail time. For instance, I purchased my very first shares of CSUH for just over sixty cents, then a few more in the twenties and then some in the teens; however, I loaded up at below five cents because while the stock was dropping, the company continued to have the same potential that I thought it had when I bought those first shares.

I'll admit, it hurts to buy stocks as they're dropping and you've got to be very confident in your DD to do that, but if you get a good one that pays off, that one stock could instantly turn your entire portfolio into 'house money.'

A HUGE Disclaimer: You've got to be responsible for your own DD, don't invest just based on a stock tip from a friend, news source or a blog - anyone. As I've emphasized before, have an entry and an exit strategy for your stock and be happy taking profits on the way up AND be patient and remain stable if the stock drops; and never look in your portfolio and see a stock that you can't instantly identify the reason that you bought it.

Remember, the larger portion of society has been trained to believe that a fifteen percent annual gain is great; but VFC doesn't want to be old and drueling all over himself when it comes time to spend money. I say stay home a few nights out of the week, since it's play money and play time anyway, use it to find some good speculative plays with potential and pick up a few shares accordingly.

If it pays off, then take your vacations now while you can still enjoy them instead of waiting until you need Sally from the United desk to wheelchair your butt onto the tarmac in Los Cabos.

Back to the question at hand, I think that a full portfolio should have a little bit of everything, but much of what you decide to invest in has to do with your own comfort level and tolerance for risk. Maybe most importantly, you've got to identify you level of patience. While we all love quick gains, some stocks take years to pay off, and your level of patience in a particular stock should be a part of your entry/exit strategy.

This is all just my own opinion based on my own experience and strategies. Do your own DD and identify your own levels of risk and comfort before investing in any particular stock.