Penny Stocks And Value Investing: Facts And Myths

Penny Stock Via Value – Edge

Ever heard of the phrase, “never judge the book by its cover”? Well, the same goes for investing in stocks, especially penny stocks. Recently, I read an article on fifth person regarding the dangers of penny stocks. While I do agree with their points brought up, however, I feel that there is this stigma attached to the term “penny stock” especially how they associate it with speculation. Every time I bring up buying penny stocks to more seasoned investors, their initial response would always be how risky it is.

In SEC terms, any stock that has a value of less than 5 dollars per share and also which is not exchanged on the major exchanges (like NYSE or NASDAQ) is called a penny stock. These types of stocks are traded over the counter and they are listed in exchange boards such as Pink Sheets or in the OTCBB. In the context of Singapore, they are just stocks trading under a dollar.

There is this misconception that penny stocks are priced so low due to reasons such as consistent poor performance, the company usually reporting a net loss or reasons to believe that there is accounting fraud. They aren’t wrong as we do see such cases such as Scintronix (T20.SI) trading at 0.1 cents due to consistent poor performance or s-chips like China Fibretech (F6D.SI) due to the public’s fear of accounting fraud. However, to just throw the baby out with the bathwater is not very fair. There are many other unloved penny stocks that are hidden gems waiting to be discovered. As long as we do proper research, we will realize that many of these penny stocks are undervalued, offering us a large margin of safety and huge potential gains. As one would observe, I owe my portfolio’s performance largely to such penny stocks. One of my darling penny stocks would be Silverlake Axis (5CP.SI) purchased at SGD0.35 and giving me a total return of over 170% including dividends within a time frame of about 1.5 years. Furthermore, if one were to actually hold the stock till now, it would translate to a total return of 237%!

Walter Schloss’s Wisdom

Walter Schloss v S&PWalter Schloss was a legendary value investor and some might call him the last traditional value investor. Schloss was an old school value investor. He looked for bargains on a price-to-book basis, preferring stocks that were trading at 52-weeks lows over other opportunities. He spent several years working with Benjamin Graham before moving off to Read More


Image Penny Stock
Penny Stock

To sum it up, I hope this post will help alleviate investor’s fear of penny stocks and to some extent their view towards penny stocks being riskier than blue chips. Honestly, what is risk? Imagine, Person A buys a penny stock offering 50% margin of safety compared to Person B who buys a blue chip that is 50% overvalued. To me, Person B is actually at a greater risk as he is overpaying for a stock and in the event that the share price normalizes in the long term, he is actually facing a potential loss of 50%.

Disclaimer: The authors have no vested interest in 5CP.SI, T20.SI, F6D.SI

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I developed my passion for investment management especially equity research at a relatively young age. My investment journey began when I was 20, at a point in time where markets were still recovering from the Global Financial Crisis. My portfolio started from money I saved over the past years and through working during the holidays. I was fortunate to have a good friend with common investing mentality to began my journey towards value investing. To date, we still research and invest in companies together, discussing valuations and potential risks of a company. To date, I manage a fund with a value investing style. Positions are decided upon via a bottom-up approach or smart speculation (a term I came up with when buying a stock for quick profit due to a mismatch in prices in the market due to takeovers/selling of a subsidiary or associate). Apart from managing my own portfolio, I enjoy sharing my research with family and friends, seeking their opinions and views towards the stock. Reading Economics in London, I constantly keep up with the financial news in Singapore & Hong Kong. Despite my busy schedule, it has not stopped me from enjoying other aspects of life. I enjoy a variety of activities in whatever free time I may have – endurance running, marathons, traveling, fine dining, whiskey appreciation, fashion. Lastly, I enjoy meeting new people, discussing ideas and gaining new perspectives towards issues in the world.