My Gambling and Speculating in Pink Sheets


Written by

Jae Jun

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This is what I said a couple of weeks back.

“I have 50% of my portfolio in my top 3 positions. None of the losses has been realized and I’m content to wait it out… 3 out of my top 4 holdings are listed on the pink sheets or ADR.”

In response to my Q3 update, there were some legitimate comments on seeking alpha that I should address if you are a new readers and if you are a loyal long time reader.

Pink Sheets and OTC Stocks

I do not mind putting money into pink sheets or OTC stocks. In fact, I prefer it, as the biggest inefficiencies exist in this area.

However, don’t fall for the big misconception about pink sheets and OTC stocks as you’ll see in the quotes below. This is akin to people still believing that Colombia is a dangerous country to travel. If you have been to Colombia recently you’ll realize that it is a very pleasant place to travel, unlike the rumors and assumptions people prefer to believe.

One of the pitfalls to investing and most things in general is assuming.

“WHOA NELLY. Buffett would never invest this way, and this is certainly not “old school investing.” I think your strategy is more akin to gambling, and you will lose alot more in the next 9 months on these investments. Even an aggressive young investor should probably have no more than 15% his/her assets in wildly speculative gambles.

Does someone know how often (the statistical likelihood) Pink Sheets go to zero in recessionary environments? Coming up!”

Buffett and his family have close to their entire net worth in Berkshire. While Berkshire itself is diversified, owning a portfolio made up of 100% Berkshire shares is the same concept.

In the 1960’s Buffett bet around 40% of his portfolio on American Express despite a disagreement from Charlie Munger and you all know Buffett’s stance on diversification.

“if you really know businesses, you probably shouldn’t own more than six of them. If you can identify six wonderful businesses that is all the diversification you need… going into a seventh one, rather than putting money into your first one, has got to be a terrible mistake.” – Warren Buffett

I do understand and admit that I will make mistakes, and if such a big position goes the other way, it will be an extremely costly and painful mistake, but given the undervaluation I see in my current top 3 holdings, I’ll stick with my conviction and let time work its magic.

Not Old School Value Investing?

“However, it’s also odd to me that he chooses to practice them so heavily on non-Old School stocks – pink sheets of little-known companies with very low volume. Yeah, the numbers look super on paper, but with little institutional interest or investment, these stocks seem to have a high likelihood of never fulfilling their potential.

It also decreases the appeal of his blog since I’m sure many of his target value-investing readers aren’t willing to follow him into pink sheets.”

and

“Clearly you are not concerned about fraud investing in companies on pink sheets. Are these companies audited in the same way as companies on the Nasdaq and NYSE?”

Some excellent companies exist in the pink sheet world. You just have to stick your head in and find out. Companies such as ThyssenKrupp is a German industrial giant trading on the pink sheets under TYEKF. This company is better than most stocks listed on the bigger exchanges.

Fairfax Financial Holdings (FRFHF) is another pink sheet stock run by Prem Watsa dubbed the Canadian Warren Buffett.

My stock pick Retail Holdings (RHDGF) is another such company. Strong presence where it operates, just not on the main stock indexes.

Following my Stock Picks

I just hope nobody blindly follows me into anything.

If you follow other people into investments you are essentially doubling your risk before you even put down your money. I could be wrong and you could be wrong about me which in a way is doubling the human risk.

This site is a way for me to document my thoughts, be transparent and he honest with myself. I hope that you as a reader and follower continue to challenge my ideas. It only helps to sharpen both our investment skills. There are no hard feelings as long as we are communicating constructively and openly.

Benchmarking

“Speculating on Pink Sheets (perhaps reasonably, perhaps not) you shouldn’t benchmark to the S&P500. No sophisticated investor sees these as equivalent investments – that comparison itself is a red flag.”

I tend to benchmark against the S&P500 and Russell2000. Other than that, I don’t focus much on benchmarking. In 2007 and 2008, I had no idea what benchmarking was. All I knew was that I needed to limit my losses.

Focusing on trying to beat the market every year is a recipe for short term-ism.

I’m not a hedge fund or a mutual fund and I don’t have to report numbers to anyone. This flexibility allows me purchase deeply undervalued companies and hold it for several years until the market doesn’t have a choice but to assign a fairer value to it.

Either way, if you know of a OTC benchmark or some similar small/micro cap index with readily available figures, let me know. I’ll include it from now on.

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