Even the nihilists out there (anyone?) will be disheartened by this: A new nationwide survey finds that "top economists expect the already deep recession to get even worse this year."
That bad news, coming during a bear market that's decimated just about every stock investor's portfolio, can only mean one thing.
It's time for penny stocks
Stocks were down some 40% in 2008 and are down an additional 7% to start '09, so we can think of only one move to make right now. Buy penny stocks.
That's right, those tiny, low-priced lottery tickets have tremendous upside potential. They're our only shot to make up 2008's losses … fast!
Who's with us?
After all, why would anyone want to buy $160 billion Procter & Gamble (NYSE: PG ) when they could own a significant stake in the upside potential of $50 million Spectrum Pharmaceuticals (Nasdaq: SPPI ) and its portfolio of potential cancer blockbusters?
C'mon! The best we'll get out of Procter & Gamble is 8% to 10% annual growth, some share repurchases, and a dividend. But Spectrum? Whoa! If it "solves" cancer, we'll be filthy rich!
Alas, this is not investing. And if you thought we were serious about penny stocks, please check out an old anti-pennies rant of ours, "Why We Love Wild Penny Stocks."
See, investing in penny stocks is speculating, not investing. Vanguard founder Jack Bogle, in remarks here at Fool HQ in December, said that a single question will separate the wheat from the chaff: Are you an investor, or are you a speculator?
Speculating -- at all, but especially in penny stocks -- is not investing, now or ever. Indeed, Proctor & Gamble will preserve your capital and earn you a healthy return. Spectrum has the potential to go up, but it also might go to $0. Unless you're an expert in analyzing their science, we'd advise you to stay away.
The story behind our headline
Advising folks to avoid penny stocks may seem obvious, but in fact, many "investors" are looking to buy up wild penny stocks precisely to make up for the losses they may have endured last year.
And this isn't particularly unusual. A forthcoming research paper by Alok Kumar of the University of Texas showed that "individual investors' demand for lottery-type stocks increases when economic conditions worsen."
Several years back, economists Richard Thaler and Eric Johnson speculated that there may exist a "break-even effect," where, given past losses, people are faster to turn to outcomes that offer a chance to break even. And it would make sense in today's market.
After all, the market lost nearly 40% in 2008, and over 7% thus far in 2009. Shareholders of once-proud blue chips like General Electric (NYSE: GE ) , Xerox (NYSE: XRX ) , and Bank of America (NYSE: BAC ) lost 50% or more last year. Even the highflying, seemingly unstoppable duo of Apple (Nasdaq: AAPL ) and Google (Nasdaq: GOOG ) were cut in half last year! Calling today a "great buying opportunity" is little consolation to shareholders of those businesses (even if we believe that to be a true statement).
Of course, the flight to "lottery-type stocks" would be a fabulous development … if these stocks delivered lottery-type rewards. But if you've ever played the lottery, you know that you're way more likely to lose for the rest of your life than you are to win -- even just once.
And so it goes with penny stocks. Professor Kumar found that folks who buy penny stocks earn at least 4% lower average returns -- every year -- than those who don't.
Where to from here
In a column we wrote last year, we excerpted an insightful Richard Russell essay that compared an investor who had ample funds and an investor who was more desperate:
This fellow always feels pressured to "make money." And in return, he's always pressuring the market to "do something" for him. But sadly, the market isn't interested. When the little guy isn't buying stocks offering 1% or 2% yields, he's off to Las Vegas or Atlantic City trying to beat the house at roulette. ... And because the little guy is trying to force the market to do something, he's a guaranteed loser.
Not to put too fine a point on it, but buying wild penny stocks -- recession or expansion -- all but guarantees that you're an investing loser.
The Foolish bottom line
Penny stocks like Spectrum offer more risk, lower returns, and the potential for total capital loss. We'd advise you, then, to stray from speculating and stick with investing.
But if it is room to run and wide market opportunities you're after, we'd advise you to look at international stocks. As co-advisor of our Motley Fool Global Gains service (Tim) and a contributing author to the international investing chapter of our most recent book (Brian), we believe the growth potential of many foreign stocks -- even some of the stalwarts -- could lead to multibagger returns at today's prices.
Right now, we're offering a full-privileges tour of Global Gains free for 30 days. Come tour the service and get our team's top five foreign stocks for right now, by just clicking here.
Tim Hanson is co-advisor of Global Gains and does not own shares of any company mentioned. Brian Richards is assistant to the regional manager, Dunder Mifflin Scranton, and does not own any companies mentioned. Google is a Motley Fool Rule Breakers selection. Apple is a Stock Advisor pick. Bank of America is a former Income Investor choice. The Fool owns shares of Procter & Gamble. The Motley Fool is investors writing for investors.