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.

  • Paul

    Old school value investing is about finding inefficient pricing and value and doesn’t rely on only finding NYSE or NASDAQ listed stocks.

    Some people just don’t get it, but you can hardly blame them for some of the fear mongering that goes on about OTC stocks sometimes.

    Keep up the good work Jae.

  • Value is value. Doesn’t matter where you find it. You could find designer mid-century modern furniture on craigslist being sold by someone who doesn’t know a thing about it and prices it accordingly, and be considered a value investor.

    http://knowyourmeme.com/i/000/039/080/original/5008_9c00_420.gif?1265669754

  • bill lawlor

    the changes in the market require an ability to change our approach. i believe this is one way to adapt to the new normal.

  • this post also reminds me to update my investing philosophy. I took down that page because I couldnt find a place for it on the site, but I’ll have to think of something now so that new readers understand what it’s about. Prefer everyone to start off with the right mindset.

  • “Investment is most intelligent when it is most businesslike.” – Benjamin Graham

    It makes no difference what exchange a business is listed on or even if it is public or private. If one understands that business and it possesses certain other attributes and you pay a reasonable price for it, that is all that matters.

  • Keith Tobin

    Wow! The title of this post through me off for a minute. I know that “gambling” or “speculating” are not the attributes of an investor, but I get the point after reading the entire post.
    Philip A. Fisher in Common Stocks and Uncommon Profits has a section on investing in OTC markets.
    So, if you did your due diligence in researching your investments and are confident in your decision, stand by it and reap the profits when they come.

  • derek

    I would not shy away from OTC/pink sheets companies so long as they report their financials. That’s not to say NASDAQ, NYSE, or TSX stocks are always safe because the companies listed always post quarterly numbers. We all know of occasions when those numbers have been massaged or are flat-out fraudulent.

    However, a company that withholds most or all of its financial data is not going to get my money.

  • DB

    I’m the guy who left the 1st comment under the “not old school value investing?” section.

    I understand your point that value is value. But what really moves stocks is big institutional investment. If those guys are not interested in the places you’re looking, then who is going to move those stocks even if they’re undervalued?

    Shouldn’t we be looking for stocks *under* the radar, not *off* the radar? I’m just sayin’…that would get me a whole lot more excited about oldschoolvalue.com.

  • LNA

    It doesn’t matter where you find opportunities,so long as there is intrinsic value and a time horizon to realize it. There are big advantages to finding gems “off” the radar as there is less competition. You don’t necessarily need demand created by big institutional investment to move a stock. There are many ways a company can increase shareholder value. Big guys such as Third Avenue and Baupost look in there from time-to-time. When Buffett had his partnership, he would go off exchanges from time-to-time also.

  • Like the commenter above said, there is more than one way to create value for a shareholder. And a lot of great value investors have had a rough year or two. Some poor quality, high risk assets are priced quite high, but this was also the case in the late nineties, and value investing eventually paid off. Thanks for the “mindset update” great post!

  • DB

    @ LNA – It does matter. The price of a stock doesn’t just magically move up because it’s undervalued. There must be large buyers to sustain an upward price movement. Stock prices reflect the demand of sellers and buyers. If there are few buyers, your stock is not going to move up.

    Increased shareholder value doesn’t mean much if the stock price never moves in step. Stock value and the value of the actual underlying business may have no direct relationship. Stock prices go up and down everyday while the value of a business can remain relatively constant. Conversely, a business can increase in value while its stock remains stagnant or deflates.

    How do you increase the likelihood that the stock you pick will move in step with the value of the actual business? You want to find stocks that are at least visible and will also be discovered by large buyers.

    Finding gems “off the radar” because there is less competition? That’s a sure way to sink your money into a quagmire. If your stock is never “discovered,” it will probably never move either because there is no demand, no buying, nothing to put consistent price pressure to move the stock up.

    I found oldschoolvalue through Jae’s old posts on fwallstreet.com. At the time, I had just finished Joe Ponzio’s book F Wallstreet, Phil Town’s Rule #1, and Michael Swanson’s Strategic Stock Trading/Wallstreetwindow. While oldschoolvalue’s principles are closely tied with those presented in F Wall Street and Rule #1, in practice it also seems to ignore some of the market realities taught in Rule #1 and the Wallstreetwindow book, which is that the big investment banks essentially ARE the market. If you look off their radar, you’re putting yourself in a harder-to-succeed position.

    Why not look at indexed stocks that are at least in the field of play, and apply your principles there? If there are no good picks, then that’s sometimes how it goes.

  • Anyone who says Buffett would never touch stocks on the PK obviously does not know Buffett’s history. He used to scour the pink sheets when they were physical pink sheets with quotes delivered once a week. My guess is that if Warren were starting off today with a much smaller sum of money he would be doing the same thing.

    The more people fear or don’t understand issues traded over the counter the better it is for us 🙂

  • @ DB,
    I completely see what point you are bringing up and I can’t say it is wrong, because it isn’t. Big institutions do make up the market but the difference in investing philosophy that I practice is that I’m perfectly content to wait it out. In the end, even good, obscure companies turn out to be great investments over time. I’m not looking for a quick successful turnover within a year.

    I can tell you are good with your particular investment style and that’s good. More opinions to round out each others viewpoints/weaknesses. I’m glad you took the time to comment.

  • Aw boo. My haters gotta hate link is dead

  • JB

    The big issue I have with pinks is liquidity and there is no SEC filing requirement for a US based pink so the accounting may be suspect.

    However, pinks that are foreign companies on other exchanges that has listing requirements are OK to hold provided you have a broker that makes a market in the country of the company’s origin. If you own a foreign pink without a broker who makes a market in that country tends to be inefficiently priced and illiquid.

  • lokgp

    Jun,
    It gets really tough when you are disclosing your investment to others especially when you are contrary to most opinion.

    And furthermore, it forces you to stand with your investment even when you are wrong. There is a tendency to stick with old choices bias. Even when facts tells you so, you will just tend to stick to the old opinion. It gets very personal.

    I don’t think pink sheet or OTC is bad. Possibly the greatest inefficiencies exist there. I would think so too.

    My opinion, is that instead of revealing your positions, you can share your research or goals with your fans and visitors instead.
    That should keep you committed yet, separating your emotions away.

  • rawiron1

    Marijuana stocks on the OTC pink list! $$$

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