# Is this a viable strategy?



## Synergy (3 June 2008)

So I decided to look back to the very first shares i bought in feb 2007 to see what they were up to now...

Well, If i'd held those shares, my portfolio would be up 190%. 

Needless to say, i'm not up 190%.

Of the 8 positions, 3 have incerased, (BRM, + 1100%, PMM, +270%, and JMS +2%), even with a few massive losses (a -80% and 2 -50%'s) they're still up nearly 200% overall. 

This got me thinking, what would happen if i bought say 50 small cap shares and left them for 5 years? There would surely be a couple that were +1000% after 5 years. That alone would likely cover any losses. 

Does anyone have a stash of sub 10c shares stuck away in their bottom draw? 

And has anyone tested something similar to see if it is a viable strategy?


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## theasxgorilla (3 June 2008)

Synergy said:


> Does anyone have a stash of sub 10c shares stuck away in their bottom draw?




A member of my extended family does.  He puts them there after buying them at much higher prices and watching them fall.  He also has a nasty habit of adding to his holdings before relegating them to the bottom draw.


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## Synergy (3 June 2008)

Curiosity got the better of me and I had a little play...

Buying all aussie stocks <10c on 3/6/03, and selling those that still remained on 2/6/08 this is what i found:

Total Stocks bought: 222
Codes that no longer exist: 52
Win %: 56%
average win: 830%
median win: 270%
Total average: 435%

so a gain of 435% over 5 years, quite surprised by that result.
All codes that no longer exist have been given a -100% outcome. In reality this would not be the case with some stocks changing codes etc.
data also doesn't account for consolidations.


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## prawn_86 (3 June 2008)

Intersting Synergy.

Can you give the loss output as well please?

The next question is how do you chose the right ones? As not many could afford to put a bit in every one.


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## Nick Radge (3 June 2008)

So the question is not "is this a viable strategy?", but "*WHY* would this strategy make money?"


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## caribean (3 June 2008)

I'll hazard a guess here, it's a kind of crude, forced money management "technique", though i think you can do a lot better....


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## theasxgorilla (3 June 2008)

Nick Radge said:


> So the question is not "is this a viable strategy?", but *"WHY would this strategy make money?"*




My instant knee-jerk thought is, it makes money because of a roaring bull-market where lots of penny-dreadful miners have been speculated on like hell.

Run the same test with a start-day of 3/6/07 to see what kind of 'experience' you might have been going through now if you'd kicked off this system then.


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## Nick Radge (3 June 2008)

Exactly.

This strategy relies on those stocks that go to the moon, enough so that those that go broke are offset. Nothing more, nothing less.

So, the question of "which stocks will those be?" itself into some kind of analysis.

My point is that the only thing YOU can control is how much you are willing to lose. Everything else is luck.


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## Synergy (3 June 2008)

prawn_86 said:


> Intersting Synergy.
> 
> Can you give the loss output as well please?
> 
> The next question is how do you chose the right ones? As not many could afford to put a bit in every one.




Prawn,

Avg Loss with the 52 -100%'s included is -73%
the average loss for those codes that still exist is -43%

I agree it relies on a fair amount of luck, but the top 10% of wins are all over 1000% return. Not a bad strike rate. I filtered out a few that appeared to have undergone consolidations and other funny business. Need better data though for this sort of thing.


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## MichaelD (3 June 2008)

Nick Radge said:


> My point is that the only thing YOU can control is how much you are willing to lose. Everything else is luck.




I don't think the masses believe you.


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## tech/a (3 June 2008)

Your not the first to ponder this.

Looking at Nicks truth.

If you had $50K to park on the theory.
Buying the lowest low in the past 3 yrs of 10 Resource or Energy stocks.

You need 1 to X by 11 The rest can go broke.

So lets say they are 5c average (I could do the exercise but hey)
a 5c stock would need to go to 55c---impossible--highly unlikely--who knows
its a gamble.

In 2003 FLX was 35c its now $22.50 ish.

You get my point.
Now where is that lazy 50K.


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## nizar (3 June 2008)

Nick Radge said:


> This strategy relies on those stocks that go to the moon, enough so that those that go broke are offset. Nothing more, nothing less.




"The worst mistake a trader can make is to miss a major profit opportunity. *95 percent of profits come from only 5 percent of the trades*" - Richard Dennis.


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## prawn_86 (3 June 2008)

While there is no doubting that something like this would be a gamble, i think one could improve the odds with a bit of fundamental analysis.

IE - avoid stocks with poor management (although some would have argued that re Twiggy and Fortescue ), try to forecast macro trends (perhaps 'green/eco' stocks will boom over the next decade), look for co's with a wide range of products that can come on board fairly quickly, etc etc

Again as others have said, i think the bull market has had the biggest effect.

What would happen if you tried from 1998 - 2003? Or random dates like that.

Plus if you are not buying the whole lot (universe do you traders call it?), then its a matter of chance/money management/fundy analysis


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## jet328 (3 June 2008)

prawn_86 said:


> IE - avoid stocks with poor management (although some would have argued that re Twiggy and Fortescue ), try to forecast macro trends (perhaps 'green/eco' stocks will boom over the next decade), look for co's with a wide range of products that can come on board fairly quickly, etc etc




I'd think this would have exactly the opposite intended effect.

Part of the reason FMG did so well was that no one was interested (who wanted to invest in shipping an abundant commodity, with high CAPEX & after Anaconda at the time?
Similar thing with coal. (Who wanted to invest in an outdated polluting bulk commodity?)

Most of the time the best gains come from the areas where no one is interested at the time. If people are interested eg. green stocks, there is usually upside factored in


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## Temjin (3 June 2008)

MichaelD said:


> I don't think the masses believe you.




Unfortunately, this is the truth. That's why the majority of the traders lose. 

I agree that penny stock strategy worked because the period was still in a bull phase. 

I wondered how many Rs that strategy gave if one used 50% of the stock price as stop loss.


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## theasxgorilla (3 June 2008)

prawn_86 said:


> What would happen if you tried from 1998 - 2003? Or random dates like that.




If you consider that it takes a 100% gain to rebalance a 50% loss, then the 'luck' of any randomly selected start-date during a test or trading period is of utmost significance, IMO.


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## yonnie (3 December 2009)

I`m bumping this thread..........

we`re just coming out of a recession and prices are still low.

bet this system is going to be a winner in the coming years


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## yonnie (5 December 2009)

if the figures from Synergy are correct then if you put $  1,000 in each of the 222 stocks = $ 222,000

losses 52 stocks @ 100% = $ 52,000
losses 46 stocks @  43% = $ 20,000

total losses are $ 72,000

total wins are 124 stocks @ 830% = 1,030,000

nett profit $ 958,000

losses are only 7% of the profits.
trying to limit losses at all cost wont help you much in this scenario and some of these stocks might even turn into big winners later.
so you dont even have to control your losses: did I say that?

just calculated this system returns around 33% per year.

is this a viable strategy?


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## Airfireman (7 December 2009)

yonnie: I concure

This post makes a good read and now with the world coming back from GFC this system could easily work...So in the words of Tech/a "Now where is that lazy 50K" 

Tim


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## yonnie (7 December 2009)

to ramble on.........

so 52 trades were written off, although like Synergy said
some/most might have changed code and/or consolidated.
for now I just assume those 52 trades were real losses.

52 losses might not seem much in the P/L count, but had you placed those $ 52,000 into winning trades @ 830% profit each..........

can you prevent investing in 52 companies that go down the gurgle?
absolutely; those companies only go bankrupt because they cant pay the bills. 
so yes, if you never invest in companies that dont have the cash to pay the bills for at least the next 1-2 quarters.

now lets say because of our nimble footwork we dont get caught out holding a dummy and we invest in 52 other companies or we raise the $ 1,000 we invest in each company..............

Synergy had 124 winners @ 830% profit and 46 losers @ 43% loss.
lets assume that those 52 dummies work out the same way as those trades above = 38 winners and 14 losers.
the extra profit will be $ 361,000.

our overall profit rises to $ 1,319,000 = 43% per year.

how`s that for a lazy system......

so is this a viable strategy?


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## RazzaDazzla (9 December 2009)

Interesting.

Find me a universe of these wonder stocks that have enough cash on their balance sheets to ensure they survive for the next 12 months.

I'll then divide my capital into equal units and invest equally. I might even set a stop loss of 50% or something like that?

I can't think of any other ways to make sure you get out of the losers and onto the winners.


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## yonnie (10 December 2009)

RazzaDazzla said:


> Interesting.
> 
> 
> 
> ...


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## Synergy (10 December 2009)

I haven't given this any more thought since bringing up the idea, but thinking about it again now, I probably should have.

yonnie, I think the extreme volatility with penny stocks is the key. Moves are fast, and often based on rumours and forum hype. I think that unless you had good info/research that a stock was going to go belly up, you'd have to ride out the dips to catch those that rocket up. Often the biggest rises are after lows are made, when interest is built because people start to believe 'it can't go lower'.

Obviously those that pay off in the long term have more than hype behind them, but at 5c they all look much the same. Is there a rich volunteer who wants to buy up and give us quarterly updates?


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## RazzaDazzla (11 December 2009)

I'll volunteer!

If every ASF member can deposit $10 into my bank account I'll get the ball rolling


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## yonnie (11 December 2009)

the largest benefit to penny stocks in general is coming out of a economic slump and getting into a raging bull market. 
these share values will increase like any other stock without a success story.
but if there is a story behind it as well.......watch out.

good info about cash strapped companies are in their quarterly announcements and you can take the appropriate action upon reading them.
I know that the losses are not that large %-wise in the whole picture.
but if you would channel the capital taken up by those 46 losers into winning stocks @ 830%...........

well to cut a whole story short, I have a lot of trust in this system and it wouldn`t surprise me at all if this system would return 100% per year over the cycle.


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## yonnie (11 December 2009)

100% per year in experienced hands that is..........


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## yonnie (12 December 2009)

I`ll ramble on.........

I ran a test and it seems like there are more than 1,000 equities under 10 cents.
now included in this figure are company options and partly paid shares and if we exclude those I think we still end up with around 700 companies.
far too many I would say.

how can we cut down on the number of companies?
1) only chose companies which have low debt and enough cash to survive the next 6 months; estimated 400-450 companies left
2) you might set a condition that the companies you invest in must have had a good run in the past
from memory AEX: 2 to 10 cent, then 2 to 6 cents, then 2 to 6 cents......400% profit tops in 1 cycle, not really 830% on the profitable stocks from Synergy is it.....
if it couldn`t do it in the past, why would it be able do it this time?
it is actually still hovering around its low, so no interest at all.
3) you might only want to invest in companies which are now at least 2-3x yearly low and where the volume has been steadily increasing in the last 6 months. 
this shows there is interest in the stock and that is important for further rises in the future.
4) you might decide to invest only in companies with a lower price than 5 cents or between 5-10 cents etc.

I would go for 1 and 3; if still too many stocks, 2 as well.


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## RazzaDazzla (13 December 2009)

Yeah, that's the million dollar question... how to choose the stocks.

Maybe you just randomly choose 50 stocks and spread your capital evenly.

Not sure how to best make the list to a more manageable 50 or so.


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## yonnie (13 December 2009)

I certainly would not choose 50 stocks randomly; for instance I would not like my chosen company to go belly up through lack of funds.


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