Investments: Penny Stocks, Dollar Profits

All right, all you free-marketeers, put your money where your mouth is. The world's freest stock market is the Vancouver Stock Exchange. Why not take a flyer in this volatile market? You could lose your shirt, but you could make a bundle. Those are the chances you take in a laissez-faire market. It's not for security-conscious widows, retirees, or government bureaucrats. It's for speculators only.

What's the lure? Big profits, of course. Recently, a little, unknown penny stock named Canadian Ferrite went from 44 cents to over $5.00 in a matter of months. Golden Hope, a new mining company, jumped from 62 cents to $4.00 when it discovered gold in Quebec. Such opportunities occur every year on the Vancouver exchange.

The Vancouver exchange lists over 1,800 companies, and new issues are coming aboard every month. Not too many major stocks trade in Vancouver—once they become big, they graduate to the over-the-counter market or the New York market in the United States.

The Vancouver Stock Exchange is probably the fastest-growing stock exchange in the world. "More companies get their start in Vancouver than anywhere else," says Bob Bishop, editor of the Penny Stock Mining Report. Why? Because, in the words of Eric Watson, one of the principals in a new company that just issued stock through Vancouver, "it's the quickest and cheapest way to go public."

Registration with the US Securities and Exchange Commission and 50 states can take up to a year and cost $100,000 or more. Meanwhile, it cost Eric Watson and his company only $25,000 to go public in Vancouver, and it took less than six months.

But laissez faire also means caveat emptor in Vancouver. Vancouver specializes in venture-capital junior companies, which means a high-risk market. Many companies on the exchange are hyped to unreasonable levels.

You can get caught buying at the wrong time. Seasoned traders in Vancouver are notorious for running up the price of a stock, enticing novices to buy in while the stock is hot, then selling and driving it back down. Golden Hope, mentioned above, is a good example. Initially, it jumped from 62 cents to over $10.00, then dropped sharply to $4.00. As Bishop says, "It's easy to go wrong."

The Vancouver Stock Exchange has come under heavy criticism. One investment writer referred to Vancouver as "home to probably the most notorious group of stock swindlers in the world."

But investment banker Larry Abraham, who trades frequently on Vancouver, responds, "That's crazy. Everybody knows that the most notorious stock swindlers are on Wall Street, although there they call it insider trading or shrewd investment banking."

Many Canadian stocks are thinly traded, and with few outstanding shares, the market can move very quickly, up or down. Like the over-the-counter market in the United States, Vancouver stocks have high "bid/ask" spreads. (You pay the "bid" when you buy a stock, the "ask" when you sell.) Between commissions and the bid-ask spread, you sometimes need as much as a 30 percent increase in the price of the stock just to break even.

Most investors tend to buy for the long-term—the "buy and hold" strategy. If you follow this method, be prepared to have paper losses of 40–50 percent on some stocks. "That's the chance you take," says investment guru Doug Casey. "You buy ten stocks in hopes that one will strike it rich. If the other nine don't do a thing, you'll still make a bundle."

Here are my recommendations for playing this treacherous market:

First, only invest in companies that truly have substance to their value. Don't buy "moose pasture" penny mining companies that only have a hunch that gold is under the ground. Frankly, I've avoided most Canadian mining stocks because of the uncertain gold market and have opted instead for nonmining companies that offer new products or new ways to improve the quality of living in the world.

Second, start investing in Vancouver stocks when market conditions are favorable—when new issues are popular, the market index is moving up, etc. I believe 1986 will be such a year with the North American economy in a bull market.

Third, get to know as much as possible about the companies you're investing in. I suggest you get a copy of Bob Bishop's free introductory 4-page report, "Canadian Pennies," by writing Bob Bishop, P.O. Box 1217, Lafayette, CA 94549. He mainly covers mining stocks but occasionally refers to nonmining issues worth considering.

Fourth, look for bargains in penny stocks whose prices don't yet reflect their true value. Don't buy into a company whose price has already moved up by 300 percent—you could get burned very easily. Look for ones that are starting to move up but have yet to make the big move.

Fifth, find a reliable broker who looks after your interests. You don't want to buy the stocks the broker is trying to get rid of. I've seen many investors get burned by getting involved with a lousy penny-stock broker. I've had good experience with one firm: National Securities Corp. (500 Union St., Seattle, WA 98101; 800-426-1609 or, in Washington, 206-622-7200. Contact either Jerry Pogue or Bill Taylor. Minimum investment is $3,000.) Take delivery of all stock certificates.

Mark Skousen is adjunct professor of business management at Rollins College in Winter Park, Florida, and editor of Forecasts & Strategies, a financial newsletter.