FOOL ON THE HILL
For Lincoln's birthday, Rick Munarriz thinks a tribute to penny stocks is in order. Is this speculative market really worth the risk? Rick wouldn't be doing Honest Abe any favors by lying about the merits of penny stocks. He offers an emancipation proclamation against the world of supposed one-cent wonders.
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By
I'm a sucker for fate. Today's column wasn't initially assigned to me. It was supposed to be Rex Moore's (TMF Orangeblood) handiwork. I'd like to say I know exactly why the column fell into my lap, but let's be frank. I don't question fate. It knocks. I answer. We go out for a few drinks. We wind up back at my place, and I regret it the morning after. Fate knows I'm easy. I'm working on that. For all I know, Rex might have gotten caught up in the fervor of celebrating Lincoln's birthday today, so he went off to get fitted for a stylish stovepipe hat. Surely, there's a more reasonable explanation. And, yes, I'll stop calling you Shirley. Holidays tend to fall on market holidays (funny how that works), so I don't often get the chance to theme a column properly. If I were to fill this space with stock ideas or general market commentary, I'd kick myself down the road. I would have blown my chance to pay tribute to Honest Abe. But I don't want to get all sappy and historical, the way I did on Columbus Day two years ago. I refuse to follow past patterns. No, fate, I will not be making you breakfast in the morning. But I can't just turn my back on one of the country's most popular presidents. I know the Gettysburg Address by heart. My initial instinct was to title this piece "Linkin Park" and devote the column to the many places folks are parking their money these days. But what's the point? Dried oranges are yielding more juice than money market funds right now. My next idea was to dig up four compelling stock ideas and give the piece the obvious teaser headline, "Four Score." No. Too trite. What if I were to follow the footsteps of this month's Motley Fool Select, and dig up some good short candidates? I could call the column "Lincoln Logs." Hmm, getting warm, but not quite there. Then it came to me -- like pennies from heaven. Lincoln is on the cent piece, and folks get caught up in penny stocks. So many portfolios have surrendered so much that folks are beginning to get desperate. Rational investors become irrational speculators. It's not pretty. Suddenly, your money is on the three-legged horse, because that's the one paying 300-to-1 odds. The fundamentals don't factor into the decision. The poor critter probably won't even make it past the starting gate. Yet, there you are, walking up to the betting window, saying, "I want to bet it all on Tripod the Wonder Horse." Sounds strange rolling off your lips. And the money feels even stranger leaving your wallet -- for good. But aren't penny stocks the cutest? They're itsy-bitsy, 1:64 die-cast replicas of the real stock market. Who cares if they've got bigger spreads than the Ponderosa buffet, or that the average lifespan of these miniature playthings is shorter than that of a batch of sea monkeys? Well, I do. You should, too. If you're relatively new to the Fool, you may have to dig deep into the alphabet to discover the lessons behind Zeigletics. In short, fictional penny stocks can be as damaging as the real ones. The case against penny-stock investing is easy to make. The spread is too wide. The list of survivors is too thin. It's the incubator of hype. You may even see one pumped as the next Microsoft (Nasdaq: MSFT), without ever being told that the original Microsoft was never a penny stock. Sure, you can pull up a historical chart to see what appears to be Mr. Softy going public at $0.19 a share nearly 17 years ago, but do you really think an underwriter would go for that? Of course not. Microsoft closed at $28 a share that day. Countless stock splits between then and now account for the split-adjusted price. You know who has a cost basis of $0.08 a share in Cisco (Nasdaq: CSCO)? The folks who bought in when the company went public and closed at $22.25 in 1990, that's who. It's easy to get caught up in trading shiny Lincolns. We live in a world where clichés conjure up cheap value. Your thoughts are worth a penny. You can nickel-and-dime your way higher. They are as overused as they are misleading -- but that's just my two cents worth. I often wonder how Lincoln would feel about being on the penny. He may have been frugal but certainly not cheap. If I were to find myself in Atlantic City, N.J., I'd be drawn to Mediterranean Ave. and Baltic Ave. -- if only to let them know they're worth more than Monopoly claims. Sure, Benjamin Franklin once said, "A penny saved is a penny earned," but that's easy for him to say. That braggart is on the $100 bill. I guess I'm trying to say that dabbling in penny stocks just isn't worth it. It's that one vacuum in market logic where taking on greater risk doesn't come with a legitimate shot for a greater reward. It happens. It just doesn't happen enough. Playing penny poker can sour your investing experience before you even know what investing or experience actually implies. Even if you're convinced that you're picking out penny stocks for sport -- knowing full well that your entire investment is being put at great risk -- you're not just wasting your money. You're wasting your time. Lincoln wouldn't have liked that at all. Abe liked to tell a great riddle: How many legs does a dog have, if you call his tail a leg? Give up? The answer is four. Just because you call a tail a leg doesn't make it so. Tripod's tail doesn't make him a swift four-legged racehorse. Betting on Tripod doesn't make you a smarter gambler. If you want to make money in penny stocks, the choice is easy. Avoid them. You're worth more than that. Rick Munarriz is human. He has taken the speculative dips in the penny pond before. He has the scars and waterlogged ears to show for it. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.
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