The more you diversify, the closer your returns come to the overall market average. This is as true for penny stocks as any other investment vehicle. Buy a little of everything, and you get what everybody is getting.

The problem with “what everybody is getting” is that it is not life-changing, not exciting, and not going to produce any tangible result from your investment efforts. Go ahead, make 7% on your money for the next three years, and tell me how it all works out for you.

I would rather pass on diversification. I practice something different with my personal penny stock investments, something that is quite opposite actually. I call my methodology, “Pinpoint Investing.”

Simply put, I will generally only be invested in six to nine penny stocks at any one time. No matter how much capital I bring to bear, I rarely go over nine individual penny stocks.

I make sure I feel strongly about each company's prospects, know the ins and outs of their operations, follow their growth plan... (And put them through Leeds Analysis of course!)

Then, I get involved with these companies in a meaningful way. I do not get nervous putting six figure amounts into my choices, because I know that they are quality companies with tremendous upside potential.

If I have fresh money to invest, I look first to those shares that I already own. Generally I then put that new money into one of my current holdings, buying more shares in the handful of penny stocks that are already in my portfolio.

Most people look to completely new stocks when they have money to invest. I don't blame them though, because everybody on TV and the newspapers is screaming at us to diversify.

When it comes to penny stocks that shouting gets even worse - "They are risky, so lower your risk by diversifying. Better yet, don't even go near penny stocks. Even better than that, buy these mutual funds - you may make 8%!"

You know what, that whole “avoid risk” topic only flies when blue chip stocks and most mutual funds aren't trading so much lower than a few years ago. People trying to avoid risk have wound up losing a lot of money in recent years, in so-called “safe” equities.

You will almost always do better with your penny stock investments by keeping a watchful, interested and knowledgeable eye on a small portfolio, than you will by buying a little bit of everything.