Dangerous Trading: The Perils of Today's Most Profitable Stocks

Written By Alex Koyfman

Posted July 21, 2016

Investing in early-stage companies makes shareholders more money than any other investment, bar none. 

In fact, nothing else even comes close to the potential unlocked by well-placed purchases of stock in pre-profit, pre-mass commercialization firms — provided, of course, that those firms end up making good on that potential and hitting the big time. 

Those billionaire entrepreneurs you see on the covers of Forbes and Fortune more than likely got there by owning chunks of these small, development-stage enterprises and then waiting the right amount of time to see skyrocketing gains. 

venturecapitaltimeline smallClick Image to Enlarge

I’m not talking about 100% or even 1,000% profit, but profit that’s in a totally different realm altogether. 

An investment in Google (NASDAQ: GOOG), for example, back in the late ’90s, would have yielded as much as $10,000 for every dollar invested. 

Or, if you prefer to be more technical, a 1,000,000% profit. 

Facebook (NASDAQ: FB) gave its seed investors similar returns, helping some now-famous venture capitalists bank 9- and 10-figure profits from relatively modest risks.

Wall Street heavy hitter Reid Hoffman, who only staked $40,000, walked away with better than half a billion when the company went public back in May of 2012. 

This sort of super-speculative investing is how the rich get much, much, much richer in a hurry. 

Risk… It Fuels Profit But Can Also Burn You

Unfortunately, with potential reward also comes risk — the kind not often found in mainstream stocks. 

One of the biggest pitfalls is the kind I ran into just a few weeks ago, right along with my subscribers. 

Unlike Google and Facebook, which grew to giant sizes before ever going public, many early-stage companies are public long before their brands become world famous. 

Because these investments are open to non-professional investors, and their shares can be bought through basic online trading platforms like Scottrade, E-Trade, and Ameritrade, they represent the closest most investors will ever come to true venture capitalism. 

The flip side of this, however, is the danger that stems from those very same advantages. 

Let me explain. 

Several weeks ago, I wrote about a small but highly prospective tech company that specializes in information technology for the aerospace industry. 

This company’s products and services manage data produced by modern airliners while they’re in flight. 

avionics

Things like speed, weather conditions, and the status of all onboard systems are neatly collected, catalogued, and displayed for pilots and operators on the ground to use to make travel safer and more efficient. 

I knew the business model was poised for growth the moment I read about it. It was the kind of universal integration that the airline industry wanted and needed. 

And with its products and services already used by a large chunk of the industry, I also knew this company was strategically well positioned to grow radically as more and more carriers sign on. 

The Perfect Balance: Ideas and Metrics

It was a no-brainer as far as seeing future potential, and yes, it was already traded publicly. 

The problem was that this stock was barely trading… just a few thousand shares a day on average. 

Nevertheless, with share prices in the mid-$2 range, I figured that the total value of the daily traded volume would be enough to stabilize a pack of new buyers. 

So I wrote about it. 

And I then published what I wrote to a file of around 2,000 fairly active traders — subscribers to my premium newsletter. 

I expected a volume spike after that, but what happened shocked just about everyone involved. 

The initial write-up introduced the stock to readers right around the $2.70/share mark, along with a note that warned trading it above $3 might be a bit too aggressive, and that readers needed to exercise restraint to ensure the stock didn’t run off into territory that could not be sustained in the weeks moving forward. 

People didn’t listen to that warning, unfortunately, and within an hour or so, the stock was trading in the mid-$3 range, with volume several times the normal daily average. 

By the end of the trading day, which was a Friday, shares had hit $4, which, incidentally, was my 12-month target for this stock. 

I went home for the weekend already knowing what my first move come Monday morning would be. 

When I returned to my desk the following week, I immediately issued a special update to those same readers, reiterating my concern about chasing the stock. 

I also added to expect a correction that day, because $4 pricing for a stock that had been in mid-$2 territory the previous trading session was not sustainable on just a flurry of new buying. 

By late morning, that prediction came true, as shares tumbled from $4 to the low- to mid-$3 range. 

Insanity, Round Two

I felt vindicated, but only momentarily, as the readers started opening their emails and doing exactly what I warned them not to. 

They chased the stock, almost right back up to where it had closed the previous week — in the high $3s. 

manictrading

I wasn’t really baffled by this so much as annoyed. 

Traders are human, after all, and they react to high-stress situations as such. 

Tell them that they missed the bus and not to take risks to hop onto it so late in the game, and they’ll defy the logic because there’s nothing worse for an amateur trader than the feeling of being left behind. 

Except investing isn’t the same as a high school party. Missing out doesn’t mean anything at all to your social standing. In fact, knowing when not to trade is half of the work that seasoned investors do on a day-to-day basis. 

Because while coming to a party late in real life will still provide some benefit, arriving late to a running stock will hurt you. 

I find myself repeating these lessons to my readers on a regular basis, and I believe that for the best and most disciplined of them, they do sink in. 

The very next company I wrote about only traded above my prescribed buy-under momentarily, before settling down right to where I said it should be. 

Trading stably at those manageable levels, the next push upwards will be from news or other organic forces, as opposed to the combined strength of scores of manic, over-anxious investors. 

With Time Comes Sanity

Eventually, the same thing happened with the aerospace stock as well, as it settled down into the low $3 range — right where I anticipated it could stay while we waited for news and earnings announcements to take hold. 

So it turns out that although it might take more time than I’d like, people do eventually learn to control their emotions. 

And that’s the reason I’m writing this today. 

Because while readers of my premium newsletter face this lesson on a regular basis, I think it’s just as important for everyone interested in investing. 

Becoming a successful investor is as much about timing as it is about deciding where to invest in the first place. Timing can make a good stock bad, and vice versa.

In this game, there is no such thing as being fashionably late. 

And the sooner that ironclad rule settles in your mind, the sooner you can start avoiding perhaps the biggest pitfall in trading. 

For those who want to learn more about the stock I just talked about, as well as many others with venture-level gain potential, click here.

You’ll see how these early-stage companies work, how and when to become a shareholder, and how and when to exit. 

It’s information that I wish I had access to when I was starting out, and it’s available to you right now.

Fortune favors the bold,

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Alex Koyfman

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His flagship service, Microcap Insider, provides market-beating insights into some of the fastest moving, highest profit-potential companies available for public trading on the U.S. and Canadian exchanges. With more than 5 years of track record to back it up, Microcap Insider is the choice for the growth-minded investor. Alex contributes his thoughts and insights regularly to Energy and Capital. To learn more about Alex, click here.

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