How To Invest In Penny Stocks With Less Risk

| August 18, 2008 | 0 Comments

A few years back I was doing some consulting work for a penny stock company.  The CEO introduced me to an investor named Barry.  Barry isn’t like other investors.  First, he had lots of money.  Second, he invested lots of money into penny stocks.  And third, he liked to get involved in his investments.

He was in the truest sense of the phrase an activist investor.

Unlike most investors his portfolio was very concentrated.  Barry was unique.  He’d back micro capitalization (penny stock) companies.  He’d work with the management team.  He’d introduce other investors.  He’d try to drum up new customers.  He’d conduct market intelligence.  He was the most active investor I’ve ever met.

Investing in penny stocks was a full time job for him.

I’m not sure how much, but I know Barry made millions with his investments.  Now occasionally he’d have a loser in his portfolio – we all do.  But when he had a winner he made serious money.  The more I learned about Barry the more I realized this was fun for him.  He invested for the joy of investing.

Unfortunately, we all can’t be like Barry.

It sounds like fun, but being that involved is very time consuming.  It’s also risky.  You have to really commit to an investment.  It might take years for your investment to pay off . . . and it might be longer before you get your money out.

There’s an easier way . . .

Just like Barry, I like investing in penny stocks.  If you do it right the returns can be huge.  But it takes lots of time and effort.  And you can’t just focus on one company.  You need to spread your investing dollars around.  You need to find 10 or 20 ideas, sometimes more!

Does anyone really have that much time to dedicate to research?

Unfortunately, there isn’t an ETF for investing in penny stocks.  And if there was one . . . I don’t know how much I’d actually trust it.  Penny stock investing requires lots of research and due diligence.  You really need to know your stuff.

Recently, I started looking at managed funds.  There’s numerous funds that focus on the micro-cap or penny stock area.  Some have performed exceptionally well, others – not so good.  In my research, I actually found two that I really liked.

The fund at the top of my list is Turner Microcap Growth Fund (TMCGX).  Over the last 5 years this fund’s returned more than 15% per year on average . . . which is a great return.  The fund holds $600 million in assets and is diversified into about 130 holdings.  The expense ratio is 1.4%.  They have a great list of holdings, some of which I’m going to look at a little more closely in the future.

There’s only one problem.

The fund’s closed to new investors.  If you happen to already own it, keep funding your investment.  If not . . . keep an eye on it in case it reopens to new investors.

In the meantime, I’ve got another suggestion for you.

The Bjurman, Barry Micro-Cap Growth fund (BMCFX) is second on my list.  This fund, just like the Turner Growth fund has had a great run. Over the last 10 years this fund’s returned an average of more than 12% per year.  Not bad.  Although the fund’s down some 24% this year,  now might be a good time to buy the fund “on sale”.  The fund has $168 million to invest and they spread it between 60 to 70 positions.

At 1.69% the fund fee’s a bit high but the portfolio manager’s proven he can make money.  Provided he can get back on a winning streak, he’ll definitely earn every penny he collects.

This fund is still open to new investors, but who knows how long that’s going to last.  Lots of these smaller funds stop taking new money at some point.  I know it seems strange, but having too much money can hurt their returns.  If you like investing in penny stocks, take a close look at these funds.

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Category: Penny Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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