My worst investment decisions this year all related to the riskiest moves I made, investing in OTC stocks and buying after hours, both things with which I would probably be better off not getting involved (but sometimes, I just can't resist).
I own three OTC stocks (and a couple of pink sheet listings, though those are for big companies that happen to be based overseas and not actively traded here), but only one of them was purchased in 2005. I've owned SpaceDev [SPDV] and Cryo-Cell (OTCQB:CCEL) for well over a year now, and they are two of the worst performers in my portfolio, so they might qualify as big mistakes for 2005, but not 2006.
The worst timing this past year was my purchase of MMC Energy (MMCN.OB), shares of which I bought in early December at $1.24, and could now buy for about 80 cents.
MMC Energy shares have been declining because of a big registration for insider selling, which generally wouldn't worry me that much in a brand new company (it doesn't bother me when venture capitalists and insiders want to get paid for their work). In this case, it's a LOT of shares, and a company with a very small float, and those two facts combine to mean that the shares are likely to be under pressure for a while. Add that to the fact that MMC is not yet on the AMEX, an event they predicted to occur by the end of the year, and the steep decline is not that shocking, even in the absence of any bad news about the company's actual operations.
Regardless, while I still think the rule to avoid penny stocks is generally a good one because of volatility like that experienced by all my OTC shares, I still have hope for all three of these companies. SPDV and CCEL should be profitable in 2007 if things work moderately well for them, and MMC Energy is in a capital-intensive growth phase that I think has a solid chance of building a good company.
I also know, however, that all the money I put up for these companies is at risk and might all be lost; that's the price you pay for investing in a tiny company with potential, and I'm willing to be quite patient as these stories play themselves out.
My second worst investing decision last year was buying shares of a company that reported terrible news in the after hours session. I thought - and this shows you how smart I am - that the beating that Imax (NYSE:IMAX) took, following their announcement that they hadn't found a buyer, was terribly overdone, so following the news I picked up some shares in the after hours session at about $6. It's never even gotten close to returning to that level since.
So what are the lessons for me?
When investing in OTC stocks that are notoriously hard to value, especially new ones, go in with your eyes wide open and the expectation that you might lose all your money. At this level, you're really investing in business plans and management and potential most of the time, all of which can be a bit ephemeral. I'll continue to wait on these stocks, and to keep them a tiny portion of my diversified portfolio.
And the second lesson, learned after making this mistake several times, is to never ever ever trade in the after hours or in pre-open trading. For the few times when an informed investor can make money in these sessions with some lucky timing, you pay with the many times that you had the wrong conviction which, given the time frame allowed for this kind of trading, is almost always going to be based as much on emotion as anything else.
I've learned lots of other things from my mistakes and victories in the past year, but these two risky areas stand out in terms of what they've cost. I'll share some of the better decisions I made, and what I might have learned from those, in the days to come.