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"I'll eat asparagus before I give up women." - Warren Buffett in The Snowball
  • Speculating In The OTC 0 comments
    Jul 17, 2012 4:27 PM

    My core investing strategy is finding high quality companies with rising dividends. I choose a mix of stocks that are proven dividend heroes (AFL, PEP, T, MCD, etc) as well as companies with promise but shorter streaks, like WM. However exciting as it is to watch the divvies roll in, I also like to dabble a bit with established growth companies (LULU) and a smaller bit with outright speculation (SZYM, OTC:SSIE). Such speculation opens the door for a black swan to enter my portfolio, hopefully to the upside. I'm under 30, so the conventional wisdom is that I can deal with the downside due to my long investing horizon.

    One of the problems with finding a good spec stock is that information about publicly traded companies is so fast moving and ubiquitous that getting any sort of edge is difficult. A way around this problem is to investigate OTC securities, which generally have far less information disseminated (although the information is still available).

    I know what you are thinking about OTC markets. "Stay away, they said." Low liquidity. Large bid-ask spreads. No SEC filings. Scams. Penny stocks. Danger. While such risks should be considered, the whole point of a spec stock is to take on risk to have the possibility of reward.

    A blanket statement about the risk in OTC securities is not entirely true. Many quality companies trade on the OTC market - Pernod Riquard PDRDY.PK, Adidas OTCQX:ADDYY. It's not just penny stocks. Further, the OTC is divided into tiers based on financial standards, information availability, and reporting with regulators among other factors. In OTCQX, OTCQB, and OTC Pink, we are likely to find plentiful information about company financials, risks, etc. Note that the tiers are not necessarily indications of the quality of the investment.

    Bad speculative risk would be speculating in companies that don't make financials available, so when we look for OTC securities, we can limit the search to say OTCQX and OTCQB tiers. While it is possible to find gems in the lower tiers, if the financial information is not available online or via request, it's probably best to park your money elsewhere.

    The OTC markets (http://www.otcmarkets.com) is the best bet I'm aware of for screening for OTC stocks. We can screen by tier, industry, trading volume, price, industry, locale, price change %. Unfortunately, this is still a bit clumsy. Or fortunately. By expending a bit of effort with the screen, you can find a stock that others may not be willing to dig for. Personally, I set a tier, price range, limit the volume (want something undiscovered), and browse the many industry subgroups. Once you see something intriguing, it is time to investigate.

    And investigate deeply. The OTC website provides limited information. Check the company website, SEC filings, google for news, twitter, facebook, etc. The tier may help screen out a lot of the shadier stocks, but the fact is that reporting requirements are less than on NYSE or NASDAQ so due diligence is very important.

    Once you've done the research, the stocks can be bought through most brokers (e.g. on Vanguard - but by phone for the same commission as any other stock). Be sure to use a limit order as the liquidity can often be low and the bid-ask spreads quite high. And of course, take it slow and keep the investments small until you are comfortable with the process of OTC speculating.

    Further Reading:

    PennySleuth on Investing in Pink Sheets

    Investment U on Investing in Pink Sheets

    USA Today on Investing in Pink Sheets

    MicroCap Speculator on Investing in Pink Sheets

    Alex B. Gray on Investing in Pink Sheets

    Smart Investing Daily on Investing in Pink Sheets

    Disclosure: I am long OTC:SSIE, SZYM, MCD, T, WM, PEP.

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