Tuesday, July 2, 1996
A Penny Stock For Your Thoughts
or
My Great-grandfather Lost Money This Way, and So Can You
by MF Runkle

Inevitably, in every chat room I am in, somebody will come in hyping penny stocks. The last argument I was hit with was, "they're good for the smaller investor, because you can buy a lot of shares." There is something enticing in this illogical argument, so I decided to do some research in Penny Stock Land. Penny stocks are low cost (usually under a dollar), low quality issues. At one time, they actually cost a penny. (My great-grandfather bought a bunch, as you'll see if you read some of my earlier Fribbles.)

Where is the best place to find penny stocks? The OTC Bulletin Board? HA! For wimps! NASDAQ Pink Sheets? Ptui! I went to that Mecca of under-capitalized companies, that haven of hypesters, that venerable institution of Howie Wannabees, the Vancouver Stock Exchange, British Columbia, Canada.

You can check out the Vancouver Exchange on the World Wide Web, where you'll find lists of the most active stocks of the day, advances and declines, greatest ups, downs, and so on. It's a good thing too, because while the mainstream press gives information on other stock exchanges, they seem to ignore the Vancouver Exchange. It's kind of like the Championship Wrestling of professional sports.

I always thought the listing requirements were rather lax on this exchange, something like the CEO of the company must actually be alive, or only recently deceased. But there are other requirements I discovered, though. Natural Resources issuers, for example, need $175,000 (Canadian I believe) in "seed capital" proceeds. That's nothing to sneeze at; it's almost as much as you need for a gas station/convenience store franchise. You must have $100,000 allotted for exploration in the prospectus(?). Now maybe I'm reading this wrong, but that just might get a drill rig and a couple of holes drilled in some tundra. You might even get a geologist report (2 or 3 pages) from someone with a degree in geology, although it might not be from an accredited institution.

Now, to be fair, "the VSE has created a niche for itself on the international scene as a venture capital marketplace, specializing in raising capital for small-and medium-sized companies, both in the resource and non-resource industries" (their words). Ok, if they say so....

I looked up a company listed on this exchange at random, just to see what you can invest in (I won't name it, try it yourself). This one has a market capitalization of 2.6 million (Canadian) dollars. That's about the cost of a medium-sized warehouse. Its stock price is $0.49 a share (Canadian), so if everybody put about $1000 (Canadian) in this stock, it would have about 2,700 shareholders. My high school had more students than that. Doesn't take many investors to get this baby moving, does it? Imagine how volatile share prices would be on such a thinly traded stock. Sure enough, last year's high was $0.95 (Canadian), and the last price is $0.49 (well, that was the ask; the bid was $0.45), so it dropped in half. Ouch!

With the low capitalization requirements, and the small number of outstanding shares, it's easy to see the potential for swindles in penny stocks. Of course, this is counter-balanced by a significant risk to regular earnings, lack of coverage by independent analysts, and no news on the companies other than the companies' own press releases.

I am certain someone out there has made money in penny stocks without resorting to manipulation and fraud. (Actually, I only said that so I don't get flamed in E-mail.) Think about it. Could anybody logically make money on a consistent basis in penny stocks? Well, these issues do have an advantage; they provide a good way for you to lose your money in the comfort of your own home. No annoying plane rides to Las Vegas, and you don't have to sit in traffic on the Atlantic City Expressway. Just a phone call to your broker, or a few mouse clicks, and WHAMMO!, it's gone.

If you really want to invest, pass up this "great" opportunity to buy a "large position" in the "mega-fast-going-to-the-moon" penny stock. Be Foolish, not a fool, and buy a couple of shares in a good company.

Transmitted: 7/2/96