Penny Stocks or Losing Money On The Stock Market The Easy Way…

I just had a call with a potential member looking to “win big” (yes they said that) with Penny Stocks.

This article is long overdue.

We’ve got an astounding country full of amazing companies, doing incredible things, earning money and increasing their value.

Every. Single. Day.

Every single day we get between 5 and 15 people tell us how they’ve found this unbelievable company trading for 3 cents. It is massively undervalued and is going to change the world, and double, triple and quadruple its value and their owners finances along with it.

Unbelievable is the word.

Mostly because “a friend told them”, “I found the CEO on a forum and told me about it and said to keep it to myself”, or “it was inside a Christmas cracker”…

The Penny Punt

That last one was an exaggeration, or was it?

These are otherwise known as lottery tickets, a punt or universally known as a Penny Stock, or more truthfully as a Penny Punt.

Jordon Belfort, a pillar of virtue in the investing world, had the most straight forward reaction to this in the Wolf of Wall Street when he said…

Jordan Belfort: Six cents a share? Oh, come on. Who buys this crap?
Dwayne: Well, I mean, honestly mostly schmucks. Postmen, there’s always postmen. Uh, plumbers. Um, they see our ads in the back of Hustler and Popular Mechanics, and our ads actually say they can get rich quick.
[he laughs]
Back to the phone call.
A new member wanted a call back and mentioned in a note that they were going to focus on Penny Stocks as a way to learn how to trade.
As he had a smaller amount to trade with, he’d decided to pick the most volatile and dangerous area of trading to start learning from. An area where even the most expert of experts have real problems finding profit.
Why you take risks in share trading
But psychologically, when you look at how we work as humans and the nature of Penny Stocks, you can understand why people are drawn to it.
Think about it, everything we are told is good sets us up to buy these stocks! We KNOW, LOVE and are excited by the things below:
  • Cheap is good
  • Small investment for a HUGE potential return
  • I heard it off a man/woman, who knows the CEO
  • I have to get in now
Let’s look at the reality of this…
Cheap is BAD (mostly)
Cheap means the company has no value, it’s likely to fail, bad product/service, falling or zero revenue and has no trust in the market that they will succeed. Without the background knowledge of the fundamentals, all you  see is cheap, usually coupled with “it’s hugely under-valued”.
IF it is undervalued, and forms what we would call a Contrarian play then its an opportunity then this is a great potential. But less than 5% ever do the work to uncover this.
Small Investment = HUGE Returns 
If you constantly focus on big returns you’d generally be trading volatile stocks (big ups, big downs) with all your capital in one stock you want to get the most upside. Big risk, big return right?
The majority of people in this situation will not know when this risky trade is at its peak, as they are focused  on more. You’ve taken a big risk, so you deserve your big reward right? Those in the know, or who know what they are doing will start to sell pushing the price down.
Meanwhile you are waiting for it to go up again and are not interested in taking “just” 10/20/30%. That was actually your chance!
This approach is compounded by the perception that trades like this are once a year or a lifetime. Of course this depends on how it has been sold to you, usually by the friend that means well and wants to take you with them on the “ride of a lifetime”.
With 2100+ companies on the ASX, less than 4000 on the NYSE and 15,000 traded over the counter (not on a major exchange) there’s no shortage of stocks to trade.
If you act on what you are told and not on what you know, you will fall for this every time. Especially if you believe the only way you can get ahead in trading is with BIG upside.
You will take riskier and riskier trades with more and more of your portfolio until you lose everything. Finally your share trading exploits become a cautionary tale that comes out at pubs/dinner parties as a warning to anyone about getting into share trading.
Sound familiar?
I heard it from someone who knows the CEO
Oooooh forbidden knowledge that NO ONE ELSE knows, sounds fantastical!
The reality check here is that the train has long since departed the station. Unless you are actually in the circle of influencers, the power brokers, the network with net worth then its incredibly unlikely that you’ve heard anything exclusive, profitable or even true.
Please don’t fall for it, especially if that news source is from your local tavern or especially from a forum where companies sinking go to start rumours to grab some cash before properly sinking and taking you with them.
If you’ve heard it on the grapevine, then you are most likely the grape closest to the ground that’s going to get eaten by a rat.
Act Now or Miss Out
If you are someone who gets emotional or excited quickly be aware you are the perfect person to get caught buying low value shares and losing money.
Getting carried away, jumping in on trades without research is a great way for lower-value businesses to sell you their cheap stock before tanking.
Con artists have been using this as a means to seperate people from their money for 1000’s of years. Self-awareness is one of the most powerful tools in your arsenal, right next to your own research.
So what should you do? 
Good question. If you cannot control yourself don’t trade shares full stop. If you do, do not trade Penny Stocks looking for “quick wins”.
This all comes down to common sense, hard work and valuing your money, which is why 90% of people will never follow this advice.
If you are happy to at least do some work or invest in companies doing the majority of the research for you but also invest in your own knowledge to cut down the time it takes to become proficient.
Be realistic.
If you are not a natural researcher, reader, numbers person or have any interest in being so – you will not be this overnight or ever. If you’re not passionate about exercise and get a gym membership because you know you should, how many times do you go? Never, maybe once to prove you can!
Maybe just reading this far was a struggle, but since you did, here is your reward.
The secret to your share trading future…
You do not have to research 5-10 hours a day to make money in the market.
We have members doing this on 15-30 minutes a day, others spend 5-8 hours a day but it’s their choice to spend that much time doing it.
Use your common sense, invest in your knowledge and understand how the charts and markets are moving. Most of all do something that gives  confidence in your knowledge to take action with the resources you have at your disposal.
The most successful members are taking 5%-15% every week or two, every month throughout the year. Who needs a HUGE return once a year when you can get real, regular returns every week or so?
If they can, you can. You just have to choose to.
Leave your gambling at the track, focus on your education to make smart investment choices and value your money enough to not trust “tips”, especially those from friends.

If We HAD To Pick ONE STOCK This Would Be It…

We are often asked… 

“If you could invest in just ONE company right now, what would it be?” Or “If you were to buy ONE stock for your kids/ grandkids what would it be?”

So, here it is! Drum roll please……..

Firstwave (ASX:FCT)

In a nutshell, FCT’s platform enables clients to move their email & data/security from an on-premise environment into a cloud environment.

Firstwave has recently had their email cloud security platform technology globally validated, first by CISCO, then NTT Data UK

The market opportunity is enormous. If they execute well, the revenue can move from ~$10m to $40m in a relatively short space of time. 

For comparison Nasdaq listed ZScaler (US$6.0 Billion Market Cap), just filed US$63m Revenue. 

The current market cap for FCT at $0.24 is a mere $70m. 

Capital injection with funds used to support and grow.  

FCT recently raised A$6.5m via a placement and A$1.2m via an oversubscribed SPP at 28 cents per share. 

Additionally, it renegotiated a customer deal to bring forward ~12 months of revenue, which collectively should generate a cash inflow of nearly ~A$13m in Q4FY19. 

The funds raised will be used to continue developing the business case and more specifically to monetise the ‘Expand’ phase of FCT’s international expansion. 

FCT has traditionally run a very tight cash balance so we are pleased to see the company better capitalised in the short term and in a position to focus on execution rather than capital. 

ZScaler – The best comparison.

One of the best Nasdaq floats in 2018, ZScaler (US$6.0 Billion Market Cap) is a comparable company to FCT. 

More advanced in its delivery, and revenue growth is impressive. Nonetheless, the market is paying a huge price for this growth. 

If FCT rapidly moves through $30m in ARR, the business has significant fixed cost leverage to those earnings. It will also be a US$ growth business, with high recurring revenue that is extremely sticky, which trades on a high multiple here as well.

FCT – Revenue

The company is targeting to grow revenue from FY18 ~$8m to $50m in FY19-21. The company will need to invest $15m in the delivery process. 

They forecast an EBITDA Margin of ~20% ($10m after amortising the $15m overhead). 

Given the background of the company, the management is particularly cautious with guiding the market. However, NTT Data is forecast at $8m-$10m (ARR annualised recurring revenue), and CISCO has a number of Proof of Value trials underway (final process before contract). 

If these CISCO trials convert, it is not unreasonable for them to be much larger than FCT’s entire Telstra revenue piece. It would be disappointing if the CISCO relationship did not deliver $10-20m in the next 12 months. 

The market will have to sit-up and take notice of a company that grows its ARR from around $6m to A$25-30m in the space of 12-18 months. 

Telstra is the gorilla in the room in terms of Australian clients, and FCT has that validation. However, Telstra is dwarfed by the CISCO/NTT client book.

In our view, delivering this revenue growth is the key to a share price re-rating.

 

Want the short-cut to a profitable portfolio? Check out the below offer!

Equity Story Pty Ltd (ABN 94 127 714 998) is registered with the Australian Securities and Investment Commission under Australian Financial Services Licence (AFSL) 343937. General Advice Warning: This research does not constitute a personal recommendation or consider the investment objectives, financial situation or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.FCT is a current open recommendation to Equity Story clients.

Are You Preparing For The Coming Market Correction Like Thelma & Louise?

Share Trading Thelma & Louise

Sorry to be the bearer of bad news, but another market correction is coming.

You may have heard rumblings on the topic, in fact we told our members last week exactly when we expect it to happen and areas of potential risk,  focused on reducing exposure and increasing opportunity.

But before you phone a friend and jump into your car heading for the nearest cliff, there are a few things you should know…

Every time this happens we the same responses to being pre-warned about a coming correction:

  1. Does not believe it’s going to happen, does nothing
  2. Knows its coming but unsure what to do, does nothing
  3. Instantly starts taking action in line with their strategy, just right
  4. Immediately sells everything going up, sideways and down, does too much

Small or large movements in the market, up or down creates opportunity for those prepared for it. There’s nothing more boring than a stagnant market that sails sideways for months.

What is a correction?

Let’s start at the most obvious place, because truly understanding something helps you can shed your fear of it and it stops controlling your actions or inactions. Making you less likely to act on emotional decisions and stick to your plan.

A correction is a good thing (depending on your preparation). 

While there is no official definition for this, a drop of 10% from market highs is generally considered a correction. 

Given the inevitability of market pullbacks, it’s important to have an investment plan you can stick with through market ups and downs. Active investors should think about exit strategies during market volatility.

The sell-off could be driven by concerns that earnings growth, while strong, may be peaking and that economic growth has been slowing in the U.S, China and other parts of the world.

So with a correction around the corner, it may be time to brush up on what corrections have typically looked like, and what action you want to take to protect yourself.

How long and deep will this correction be?

No one can predict the timing or depth of a stock market correction with certainty.

What we do know is that they have historically been a standard part of investing. In fact, since 1920, the S&P 500 has on average experienced:

  • 5% pullback 3 times a year
  • 10% correction once a year
  • 20% bear market decline every 3 years

While it may be unsettling, it’s not unusual to experience a sell-off of this magnitude.

Note: Corrections are declines of 10% or more, while minor ones are 5%–10% (all in blue shades above). Bear markets are declines of 20% or more (in the red shade above). Source: Active Trader Pro®, as of October 28, 2018.
Stock market corrections happen regularly

One thing that is worth remembering is that the market typically recovers pretty quickly from correction.

The chart below shows the largest drop from a market high in each year (blue dot). You can see that it’s not uncommon to have significant market declines. But the market still usually recovers and produces positive results for the year (shown as the bars).

S&P 500® Index annual total returns and intra-year declines: 1980–2018

S&P Index
Past performance is no guarantee of future results. It is not possible to invest directly in an index. Returns are based on index price appreciation and dividends. Intra-year drops refer to the largest index drop from a peak to a trough during the year. For illustrative purposes only. Data as of 9/30/2018. Source: Standard & Poor’s, Bloomberg Finance LP.
What does it mean for investors?

There’s a phrase that outlines this perfectly – Amat Victoria Curam, otherwise known as Victory Loves Preparation.

A market corrections level of impact on your portfolio is directly related to your level preparation for it. Everybody trades differently but so much the same as well…

1. Long-term investors: Stick to your plan

If you are saving for retirement or another goal that is years away, the time to consider how much of a loss you can handle isn’t during a correction. Consider the appropriate risk level for your portfolio when you are looking at your long-term goals, and think clearly about your financial situation and emotional reaction to risk.

If you haven’t created a plan, you should.

If you have a plan, it’s worth checking in that your investments are still in line with that plan. And does it continue to reflect your investment horizon, financial situation, and risk tolerance. If all that is so, you will likely be in a better position to manage the ups and downs of the market. If your mix of investments is off track, consider rebalancing back to a more neutral positioning.

2. Active investors: Be ready

While most investors who have a long-term plan probably don’t need to make any portfolio changes in anticipation of a spike in market volatility. Some more-active investors may want to take action to prepare for more volatility. That could mean setting exit strategies on current positions, using stop loss orders, or tracking technical indicators for signs it’s time to sell.

More active investors might also want to consider having a cash reserve, and creating a watch list of stocks to consider buying at certain price points, to prepare for buying stocks during the downturn.

3. Retirees: Manage your income

For retirees, who may be relying on their investment portfolio for a portion of their income, a market drop can present a different kind of challenge. Hopefully, retirees have an income plan that is built to withstand different market conditions. If so, you really won’t need to react to a short-term market move. If not, it may be a good time to sit down with an advisor to discuss you strategy.

The bottom line

Market corrections are inevitable, like death and taxes. 

While we don’t know if this will be short-lived or the beginning of a bigger downturn. History shows that the market recovers quickly from corrections, and most sound investment strategies are built to withstand volatility.

As a result, long-term investors should stick with their plan, and not take on any hidden risk.

So turn off the engine and drive away from the cliff, now is not the time! Want the inside track on this?

If you are not getting the Thelma and Louise reference, shame on you and here's the final scene of the movie! Spoiler Alert! Best to watch the whole thing before this though...

What you need to know about Capital Gains Tax on shares

Buying and selling shares and other listed securities can involve Capital Gains Tax, but what do investors need to know when it comes to tax time?

Don’t ignore it and definitely prepare for it, the ATO never forgets and neither should you!

Capital Gains Tax (CGT) is a term you’ll often hear as tax time draws near. Here’s the basics of CGT, when you’re required to pay it and what happens if you make a capital loss instead of a capital gain on your shares.

Basically, if you buy shares for one price and sell them for another price then the difference between the two is your capital gain or capital loss.

In the event you receive more for your shares than you paid for them, you’ll have made a capital gain and you may need to pay tax on it.

How much tax will you pay?

The amount of tax you pay on your capital gain depends on a number of things, including how long you owned the shares, what your marginal tax rate is, and whether you have also made any capital losses.

Your marginal tax rate is important because your capital gain will be added to your assessable income in your tax return for that year.

The length of time you hold your shares is relevant because individuals can usually discount a capital gain by 50%, where you have held the asset for more than 12 months.

What is a CGT event?

Selling shares and some other assets such as an investment property, or disposing of them to someone else, triggers what’s called a ‘CGT event’.

The CGT event marks the point in time at which you make a capital gain or incur a capital loss.

Other CGT events could include when a managed fund in which you own units distributes a capital gain to you.

What happens if you make a capital loss?

You would make a capital loss on shares if you sold them for less than you paid for them.

But what’s important to note is that if you make a capital loss, you can use it to reduce a capital gain in the same income year.

What’s more, if your capital losses are greater than your capital gains, or if you make a capital loss in a financial year in which you don’t make a capital gain, you can generally carry the capital loss forward and deduct it against any capital gains you make in future years.

What happens if you have inherited shares?

A CGT event is triggered only when you sell inherited shares.

If the person who passed away bought the shares after CGT was introduced on 20 September 1985, then the person inheriting the shares will also inherit the cost base of the person who bought them at the time they want to sell the shares.

If however, the person who passed away acquired the shares before 20 September 1985 then the person inheriting them is said to have acquired the asset at the time of death, so the cost base will be the market value of the shares at that time.

What next?

We are not tax experts, seek out the expertise of a tax professional to establish what your personal exposure is, we hope this helps…

Are you trading like a gambler?

Speaking to between 80 to 100 Australian share traders every day gives us an amazing perspective on our own trading and members challenges.

We’ve heard most share trading problems over the last five years from your  stumbling blocks, reason you’ve stopped/started, failed, gave up, profited or lost everything.

But gambling is a recurring theme that even the most experienced traders display. From the language they use, how they trade and most dangerous of all, what they do.

There are a few signs you are gambling, even if you think you’re not, many of us are and do not even realise it.

Here are 6 gambling habits we see EVERY day…

  1. Going ALL In: if you’re putting all your money into a single stock this is the number one reason most people lose their trading capital.  Trading more money multiplies the “win”, but also multiplies the risk. It may seem great now but there are literally a 1000 reasons why the stock would do the exact opposite of what you expect.
  2. Free Tips: free tips are worth what you paid for them, they are generally provided with an agenda behind them or through good intentions from friends who want you to come on the journey with them. If you are not doing the research yourself or paying for properly researched information don’t expect to be given free gold.
  3. Buying Cheap Stocks: Penny Stocks are the lottery tickets of the share trading world, but pay out even fewer times. They are cheap for a reason, stop looking to buy “bargain stocks” if they lose 9 times out of 10 (and they do) there’s no bargain to be found at all.
  4. Big Money on Short Term Trades: heard some hot news? Did you put a wedge on it doing what it says it’s going to do? A famous quote by Benjamin Graham says – “In the short run, a market is a voting machine, but in the long run it is a weighing machine.” This means that difficult to predict market psychology or sentiment as this drives the market in the short term, not common sense or even proven numbers making it difficult to predict its movements.
  5. Following the crowd: you can get swept up in what everyone else is doing, mostly by the time you find out it’s too late to make anything out of it. If you’ve read a trade is worth getting into on a public trading site it’s already too late to profit from it. Unfortunately most people come in when the movement is losing momentum leaving them with shares bought at the top of it’s worth with a loss waiting to happen.
  6. You’re Always in High Risk Stocks: always making high risk trades, penny stocks, speccies or volatile industries like mining, iron etc as high risk is high reward right? NO. HIGH RISK IS ALWAYS HIGH RISK! It’s only occasionally high reward.

Other signs of gambling includes trading as you “need money”, or are wanting to “make money fast”. If this is you then it will help you make all the wrong decisions at the perfect time to lose your trading capital, especially if you combine this with any of the above “trading methods”.

And of course using money earmarked for other things to do it with, or worse getting loans or finding ways to make a trade via credit cards is a major red flag.

If you trade like this please stop now.

Take stock and change the way you trade, this will also change your results and reduce your blood pressure.

The problem is that you “won” and took some profits like this at some point, and because it worked for you this has now become how you trade.

When you lose, and you will at some point, it will be big and it could take you out of trading completely.

Now, let’s watch Dave talk through the difference between penny stocks and high-value medium-risk, 3 YR Growth stories.

 

The Art of the Trade

The Art of the Trade is how we combine simple logic, common sense approach all while avoiding the one thing that affects more share traders profit that anything else…

Greed.

Greed will kill your portfolio profits every time.

When you win you want more and hold longer than you should, or put in more money when you should be taking profits. When you lose we see people chasing losses with more money, and selling winning trades and holding losing trades hoping they come back instead of cutting their losses or having stop losses in place to protect them.

No one reading this has not fallen into one of these traps, I know I have.

Share trading can be simpler than you believe it to be, IF you keep it simple. The market has an interest in keeping it complicated leveraging services to

That’s not to say that it is not extremely difficult to do what we do every day, but anything repeated hundreds of times a day over many years doesn’t just become better, it becomes instinctual.

But that’s the point, not everyone can individually review 500 – 700 companies a day and have the luxury of doing it with a team that are you friends that all bring different disciplines to every decision we make as a team.

Watch the video.

 

 

Hot Stock of the Week: Praemium (PPS)

We’re back with another one, and this week it’s Praemium (PPS)!

The ASX 200 hasn’t been the most exciting ride with global markets on a decline seeing the ASX follow suit. In times like these our Hot Stocks haven’t been performing to the best of their potential, however they have seen stronger moves than most and it’s best to tread carefully and adjust trading strategies to better cater to stockpicking in a hard market.

With Praemium (PPS), it’s our pick this week for a few strong reasons. On the fundamental aspect, recent growth both domestically and overseas has been strong, and we expect another positive update in April. We are picking this story as well as it has had a significant pullback on the back of recent market volatility. The Praemium brand is becoming ever more popular with development and evolution of the SMSF and other functionalities.

On the technical front, after going on a recent tear and reaching highs of 85.5c PPS has had a solid pullback breaking the 20 day moving average on a weekly chart. Right now it is holding right on the 40 day moving average @ 59c. If good news is on the horizon there is plenty of blue sky between here and the recent highs!

In case you didn’t know, Praemium is an Australian/UK financial technology company specialising in creating platforms that are used by financial advisers for reporting and investments. Recent report on the half year was phenomenal with revenue up 25% to $20.5M and profit up 87% to $3.3M.

 

Hot Stock of the Week: Evolution Mining (EVN)!

This week it goes to Evolution Mining (EVN)!

One of Equity Story’s 3YR Growth stories, Evolution Mining (EVN) looked fantastic as a candidate for our Hot Stock this week and after rigorous analysis, we’ve crowned it this week’s pick.

On the fundamental front, we’ve seen EVN consistently put out growth figures with one of the lowest AISCs in the industry to boast and a record low for them at $785/oz for their recent half year. We continue to see EVN put out solid numbers and really like their Cowal operation being able to deliver 130koz just last half year.

Further, Trump’s recent political maneuvers in Trade and a weakening Aussie dollar, we see as boosts to EVN short to medium term and with technicals suggesting a break to the upside, we think gold is gaining traction and will take EVN on a ride along with it.

In a difficult market like we are experiencing now, Gold should ordinarily do well. On that general note, fingers crossed for continued momentum!