Even the nihilists out there (anyone?) will be disheartened by this: A recent 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 -- the recent semi-rally notwithstanding -- can mean only one thing.
It's time for penny stocks
Stocks fell by more than 35% in 2008 and are about breakeven for 2009, 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 a portion of $110 billion Coca-Cola
C'mon! The best we'll get out of Coke is 8% to 10% annual growth, some share repurchases, and a dividend. But Jones Soda? Whoa! If its kitschy colas catch on and take the world by storm, 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, Coke will preserve your capital and earn you a healthy return. Jones Soda has the potential to go up, and the company has been innovative with its flavors and labels, but the company is struggling to grow sales and is burning cash. Unless you're an expert at predicting consumer trends that come out of nowhere, 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 research paper by Alok Kumar of the University of Texas shows 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 really has taken a nasty tumble. Shareholders of popular tech stocks such as eBay
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. As for the desperate guy:
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 -- virtually guarantees that you're an investing loser.
The Foolish bottom line
Penny stocks like Antigenics 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, and specifically China. 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.
That's why our Global Gains team is on the ground in China right now for our annual research trip. We're meeting with companies and gathering real intelligence we can use to the beat the market over the next year. To get our notes from these meetings free in your inbox, simply provide your email in the box below.
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This article was first published Feb. 5, 2009. It has been updated.
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 recommendation. Coca-Cola, eBay, and Dell are Inside Value recommendations. eBay is a Stock Advisor pick. The Motley Fool is investors writing for investors.