Penny share lessons from my first 100 letters

Ten years ago I found myself at Centre Point, that landmark London office block at the junction of Oxford Street and Tottenham Court Road. The building seemed dilapidated, and things did not improve much when I eventually got to the twelfth floor for my meeting with Fleet Street Publications.

The office was untidy, even a little chaotic, with casually-dressed individuals half hidden behind mounds of paper. Frankly, after being used to the marble halls and neat pin stripes of the City I felt that I was coming down in the world!

But of course, one shouldn’t judge a book by its cover. And in fact that day turned out to be one of the best of my working life. It led to my becoming editor of Red Hot Penny Shares, which I am hugely proud of and privileged to write for my fellow small-cap fans.

Ten years on, and this coming Friday represents an important milestone for me. It’s the day I’ll be sending out the 100th edition of my monthly newsletter. And I’ve got a brilliant issue lined up!

But back to Centre Point, and I was asked to go away and write an article describing why people should invest in penny shares. I was given one piece of advice: ‘Write as if you were talking to somebody in the pub. Not like a boring City broker’s note’.

So I went home, adopted my best barstool manner, and in one swift splurge explained that I had always been an investor in small company shares. I gushed about why I passionately believed that others should do the same…

My alternative to the rapacious banking industry

It was quite a cathartic exercise. Through my years in stock-broking and then fund management I had become increasingly frustrated. I could see that the whole financial services industry had become far more interested in simply forcing products down the throats of unwitting savers than actually providing them a service.

I could see that most of the City’s analysts and bankers – for all their pomposity and self-importance – were not especially smart. Depressingly, many of them did not even seem particularly interested in the stock market. They were too busy counting their bonuses and climbing the greasy pole of career advancement.

Not much has changed! Savers still get a shockingly bad deal from the financial services industry, and the City is still full of people who could not earn a quarter of their pay in any other walk of life. Fortunately it has become easier for us to take matters into our own hands, as increasing numbers of Red Hot Penny Shares readers have decided to do.

My first issue was in September 2003 and my main concern at the time was simply to fill the pages. I must have been pretty desperate because the first share I tipped was BPP Holdings – a great investment but hardly a penny share. Gradually, though, I began to gather information and tune in to the penny share world.

The performance was mixed. We had some horrors –remember RingProp or Azure Dynamics? But we also had some great winners, although it is sobering to recall that three of our biggest successes, Tanfield, MyHome and Worthington Nicholls have since collapsed just as fast as they had risen.

Three important penny share ‘tells’

Practice has not made me perfect. But it has, I think, made me a lot better. I’m a stronger writer and I’ve honed my skills at finding small companies that really have the potential to make good money. Today I look for three things:

1. A sudden breakthrough

Nothing propels a penny share price upwards quicker than an oil strike or a new wonder drug. Two of our biggest successes have been Gulf Keystone, which struck oil in Kurdistan, and drug developer Verona Pharma.

2. A great product

I like nothing more than an innovative product, with good profit margins, limited competition and a big potential market. Software Radio was a perfect example, as was Clearstream Technologies.

3. A powerful theme

Every now and again investors get swept up by a powerful theme. The whole dotcom boom was one and the recent natural resources boom was another, helping us to a quick gain on emeralds producer Gemfields. If you can spot these themes you can make money fast.

The cast of penny share candidates is ever changing. Looking back I have tipped many shares such as Gourmet Holdings, Phosphagenics and Fayrewood, which are no longer on the stock market. But as companies disappear, they are replaced by a fresh crop, and the opportunity to discover potential new winners never ends. This is why I live for the small company market.

As I head in to my next 100 editions of Red Hot Penny Shares I feel the thrill of the chase as much as ever. The penny share world is a kaleidoscope of opportunity.

• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

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Red Hot Penny Shares is a regulated product issued by MoneyWeek Ltd. Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be volatile, relatively illiquid and hard to trade. There can be a large bid/offer spread so if you need to sell soon after you’ve bought, you might get less back than you paid. This can make them riskier than other investments. Please seek advice if necessary. 0207 633 3780.