Every year, financial reporters (like myself) publish “best of the year” and “worst of the year” lists of investments.
Usually, these lists only look at the biggest publicly traded companies – in the Dow Jones Industrial Average or the S&P 500, for example.
But the best and worst performing stocks are almost never in those indexes.
Today I’d like to talk about one of the biggest traps in the stock market over the past year – and what will likely be the worst class of stock investments you could ever buy.
Under most circumstances, you should strive to condition yourself to seek out hated, cheap investments. Buying assets that are hated and cheap isn't just a sound strategy; it's probably the ONLY sound strategy – in the commodity sector especially.
But the worst performing commodity investments of 2012 will likely be the worst performing commodity investments of 2013, 2014 and so on – for as long as the stock market exists.
That's because the commodity investments I'm talking about almost always go bust the overwhelming majority of the time.
And while I'm still a very bullish commodity investor, I avoid these commodity investments at all costs.
I'm talking about commodity investments that trade only on the Pink Sheets (.PK) or Over the Counter Bulletin Boards (.OTCBB). You can recognize these investments easily because they almost always have longer ticker symbols of four and sometimes five characters. And of course, they're always followed by either a .PK or .OTCBB.
If you learn nothing else from reading my daily column, I hope you will learn this lesson now: most of these companies go broke. They have no earnings. They might not even have any assets, property, sales, or even an office.
The best way that you can avoid losing money in stocks is to avoid these companies completely.
They're the fool’s gold of the investment world because they look like real companies, they have fancy literature, advertising, websites and they trade just like any other stock on any other real exchange.
To be clear, it's not just commodities investments that trade on the Pink Sheets. But it's typically the commodity investments that are among the worst of the pack. That's because being a tiny gold or oil explorer is hugely capital intensive. So these PK and OTCBB companies will continually issue shares because they need to access ever greater amounts of capital.
But I avoid all PK and OTCBB stocks – not just commodity related ones.
Ignoring these companies is easy – and it makes your investment decisions easier still. That's because when you ignore Pink Sheets companies, you immediately cut out thousands of stocks to decide from.
For a quick example of how poorly these companies perform, take a look at the biggest losers in the Dow Jones Industrial Average index:
Hewlett Packard (NYSE: HPQ) is down 45% and Intel (NYSE: INTC) is down 15%.
(The biggest winners were Bank of America (NYSE: BAC), with a year to date gain of over 101%, and Home Depot (NYSE: HD), up 45%.)
Here are two of the worst performing Pink Sheets as of last Friday – in just one day of trading:
Adelphia Recover – down over 97%
Synvista Therapeutics Inc. – down 99%!
These two companies will likely never trade again, as they currently sell for minute fractions of one penny.
Every day, dozens of these companies go belly up. Eventually, all but a small minority go broke. Only about 1 in 3,000 of these companies will get up-listed to a real exchange like the NYSE or the Nasdaq.
So please, do me a favor – do yourself a favor, and just don't buy them! Not this year. Not ever.
Have a great Christmas.