Active Investing and 33% return, lucky or correct strategy?

[DesertCat]

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You know that Bulletin Board stocks are not required to submit audited financials like NASDAQ and NYSE stocks do, right? They might be telling the truth or they might be lying.


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Many OTC & pink sheet stocks have audited financials. Sometimes they are even current on their filings with the SEC. Sometimes they are only temporarily behind. One of my biggest winners refused to file with the SEC or seek a listing for very good reason. Bayou Steel had emerged from bankruptcy with a ton of NOL's that it wanted to shield, and it actively discouraged trading of the stock because any large turnover of shareholders would cause the IRS to disallow those NOLS. But it still had audited financials, which were available over it's web site. It was eventually bought by a private equity firm at a 75% premium to it's trading price.

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Do you search the backgrounds of the officers and board of directors? Do you search trade journals for mention of their products? Do you consult experts in the field to verify that their claims seem plausible? Do you maybe even go so far as to visit the company and make sure it's for real? These are all things we do before we play a BB and we usually end up shorting it. Most BB companies will never earn a dime and a lot of them are outright scams.

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In the case of Bayou Steel I did little of that. I read their financials and their old SEC financials, which verified it was a real company. I read some news stories on it via Googe that verified it was still up and running. Then I called the CFO, which verified he was breathing. Then I bought a ton. My biggest risk with that investment wasn't fraud, it was the future direction of steel pricing.

There is a ton of value on the OTC and pinksheets. My experience is that the scams aren't that prevalent. You can usually smell a fraud as soon as you read one of their ridiculous press releases. I seldom have to go to extraordinary lengths to validate their businesses. Your advice to be wary is true, but if you want to be a value investor, this is where the most value lies.

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If you've been playing big movers and been getting out with good profits, then I would say a part of your results are luck. Usually when these things fall, they go quickly. If you are quick and not too greedy, it can be a profitable strategy. Just don't kid yourself into believing you're "investing" in the next Microsoft.

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I've been investing in OTC stocks for five years, and my results have been consistent with OP's. I can't say he's skilled or lucky, I don't know how he does his research and how well he understands value (like how to avoid value traps). But my experience is that if he's skilled and works hard at it, very good results are sustainable in this space for a small portfolio.

OTC and pink sheet stocks are big part of the reason why Warren Buffett guaranteed he could earn 50% annual returns with a $1M portfolio. It's the most inefficient, dirty, stinky, corner of the market.