Aside from hearing the proverbial, “What stocks should I buy?”, the next most common question I seem to hear is, “When should I sell?” When it comes to the first question, I will merrily defer to Warren Buffet who quipped, “Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.”
When should you sell your favorite penny stock? Well, no one, not even the most experienced money managers, has really ever figured that one out. I’d like to tell people simply not to be greedy…but I’ve been guilty of that before and been burned and am still being burned.
Unfortunately, it’s tough to find good advice when it comes to buying and selling penny stocks. In fact, some money managers and business professors don’t think small retail investors, like me and virtually every penny stock investor, should be investing in individual stocks.
One professor of finance noted recently that small investors simply don’t have the expertise to do proper evaluations. He also estimates that a truly diversified stock portfolio would require 15 or 20 stocks, which is, he believes, too difficult for the average investor to achieve…and monitor.
Where are the uneducated small retail investors wandering blindly on Wall Street to turn? Apparently, we are supposed to buy exchange-traded funds or mutual funds. Easier said than done for those interested in penny stocks.
When push comes to shove, there really aren’t very many mutual funds that invest in micro-cap stocks. For the record, micro-cap stocks are generally defined as those with capitalization under $250 million. Small-cap stocks generally have capitalizations between $250 million and $2 billion.
While certain micro-cap mutual funds do exist, it’s tough to actually get your foot in the door. There are, according to another article I read recently, only 47 funds that invest specifically in micro-cap stocks, many of which are closed to new investors, compared to 552 funds that invest in small-cap stocks.
That said, it might behoove some funds and indexes to delve into micro-cap stocks or at least open the door to new investors interested in penny stocks.
On the flip side, if you are one of the many penny stock investors not attracted to mutual funds or is more interested in doing your own research, then there’s no better time than the present to dive in.
Sure, penny stocks could get cheaper, but with so many trading below book value, now is a good time to get involved. After all, if you’re looking to capture gains over the long run, then buying penny stocks in a beaten-down sector makes sense.
Let’s presume then, that you haven’t poured your money into one of the few funds that cater to penny stocks. How do you know when its time to sell? The same business professor noted that there is no trick – but there is a framework of decision-making to follow.
First and foremost, it’s important to, “go back to the reasons you bought the stock in the first place.” Based on that, you can decide whether those objectives have been met. And whether you believe the stock is still undervalued.
After all, either you think the penny stock has room to grow or it doesn’t. Having already done your research, this ought to be, greed aside, an easy task.
