In 1936, one smart six-year-old purchased a few 6-packs of Coca Cola from his grandfather’s grocery story for a quarter per pack and resold each bottle for a nickel apiece. With that initial 20% profit he made of each 6-pack, the world’s richest man got his start in business.

Today, that same man owns $12.2 billion worth of Coca Cola Co. Obviously, I’m talking about Warren Buffet…

Everyone already knows all there is to know about him… or so they think…

Sure, we know that he went to Columbia to study under Benjamin Graham. And, that he’s one of the largest owners in many of the brand names we enjoy everyday — General Electric, Anheuser Busch, Bank of America, and of course, Coca Cola. He’s also the wealthiest man in the world, totaling $62 billion.

But there is something that only a handful of people know… He wants to be poor again.

That’s right! Back in 1999, he told Business Week “…it’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

The reason for his guarantee is simple… The best opportunities in the world are in small caps. If you have a tiny company worth 50 cents per share, it’s a lot easier for it to go to $1, as opposed to a $50 one going to $100. But that’s not the only reason Buffett loves small caps.

He also discusses his affinity for finding little nuances in companies that other investors don’t see right away. In a 2005 Kansas University interview, Buffett elaborates, “You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map – way off the map. You may find local companies that have nothing wrong with them at all…”

You can’t do that with big blue chips…

If a small company has a hidden asset that investors haven’t picked up on yet, it would take some work, but you could find it and make big money off of it. Finding a large company with a hidden asset is exponentially tougher.

There are a thousand reasons why smaller companies offer more potential, but at the end of the day, it comes down to one thing. How much more money can I make with small caps.

Buffett’s Small Cap Advantage

Through Berkshire Hathaway, Buffett brought investors gains of 10,000% from 1977 to 1992. But between 1992 and 2007, he only brought a 1,200% gain. Now, I know that still sounds pretty darn good (which it is), but the question remains, why did he do so much better in the first 15-year period of Berkshire than the second 15-year period? The answer is small caps…

You see, back in 1977, Berkshire was a much smaller company, with a lot less money to invest. So, Buffett was able to invest in smaller companies at the time, including American Express, Disney, and the Washington Post Company… Those companies were able to grow much faster than the ones Buffett is restricted to now. Now, Buffett has to look at companies worth tens of billions of dollars. In ’77, he could look at companies worth just a few hundred million dollars.

But to do even better than Buffett, your only chance is to look for companies even smaller. I’m talking companies flying way under the radar. Companies in the tens of millions of dollar range… Simply put, buy penny stocks because Warren Buffett can’t.

Sincerely,

Jim Nelson

About Author:
Jim Nelson is the managing editor of daily e-letter The Penny Sleuth. The Penny Sleuth offers unbiased commentary from expert analysts and authors on Small Cap Stocks, Pink Sheet Companies, OTCBB and Penny Stocks.

Article Source: http://www.articlerich.com

If you have been considering whether or not to buy penny stocks, it would be advisable to do a reasonable amount of research before “jumping in with both feet”, so to speak. The world of penny stocks has often been glamorized by various investment advisory services as well as so-called “stock gurus”, but in reality you have to approach investing in penny stocks with a sober-minded attitude as well as a degree of caution and level-headedness. While it is true that extravagant profits can be made in the penny stock arena, it’s also true that there are more losers than winners, mainly because many people jump into the markets prematurely, blinded by the allure of quick wealth with a relatively small up-front investment. It would behoove any would-be penny stock investor to do his or her homework before committing their hard-earned money. That being said, hopefully this article will give you a better overall understanding of the penny stock arena and why they are a viable investment if used in the right manner.

What is a Penny Stock?

The most widely accepted definition of a penny stock is any publicly-traded company whose stock trades at $5.00 per share or less. Some have argued that the share price should be $1.00 or less to be considered a true penny stock, but for the purposes of keeping things simple, we will keep the $5.00-or-under definition. Most publicly-traded penny stocks are traded on the Over the Counter Bulletin Board Exchange (also known as OTC-BB), or on the “Pink Sheets” (somewhat of the “Wild West” of the stock market). These companies are usually valued as having less than $4 million in net tangible assets, and are normally companies that don’t have any type of extensive history. This would by default include many start-up companies and “one-man shows”. Penny stocks are also known as “micro-cap stocks” due to their relatively miniscule share value.

The Potential of Penny Stocks: The Power of Leverage

The power of a penny stock is the fact that the shares are normally priced so low that there is an incredible amount of leverage available to the investor that isn’t often seen in the “blue chip” stocks, such as Google, IBM, or FedEx. Think about it: The average “blue chip” company can trade in the neighborhood of hundreds of dollars per share, which means that the stock would have to make tremendous advances in order to double. Conversely, a penny stock that’s trading at literally pennies per share can double rather quickly, thereby doubling whatever initial investment you put into the purchase of those shares. As an example, it would be much easier for a stock trading at 10 cents per share to double to 20 cents per share (a 100), but the likelihood of the penny stock doubling is much higher than the “blue chip” ever doubling due to the hefty price per share of the “blue chip”.

Leverage is a Two-Edged Sword

Although there are some fantastic opportunities that exist in the penny stock arena due to the power of leverage, the potential for loss is also greater. A slight fluctuation in the price of a “blue chip” stock may only mean a 1 drop in your investment, while that same proportionate fluctuation in a penny stock is much more violent, generating potential losses of 50% or more. This volatility factor is the primary reason that penny stocks have often been labeled as “risky”.

Invest Wisely

The most reasonable way to approach a potential investment in a penny stock is to go into the trade knowing that you could possibly lose your entire investment. If you can live with yourself in light of that knowledge, then you may be ready to handle the ups and downs of the volatile world of penny stocks. If you’re not ready to completely part with your funds, and any loss of your initial capital would cause a major financial crisis, it would be advisable for you to stay out of the markets. The old adage is true, “Never risk more than you’re willing to lose”. This holds true especially in the arena of penny stock trading.

Phil Reich is actively involved in penny stock trading using the principles of technical analysis. He maintains a blog that teaches simple principles of how to buy penny stocks and sell them for a profit based on stock chart patterns.

Article Source: http://www.articlerich.com

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