Penny Stocks and Pump-and-Dump: The Risks We Avoid
Dear Traders,
The human soul, in nature, is not inherently greedy. However, over the course of our 5,000-year civilization, we have developed both individual and collective forms of greed. Each person desires more, while society as a whole can also exhibit greed. A historical example of societal-level greed can be seen in the practice of colonialism during the European imperial expansion from the 15th to the 20th centuries. European powers sought to acquire vast territories in Asia, Africa, and the Americas, often driven by unnecessary economic motives such as resource extraction, trade monopolies, and wealth accumulation.
Examples of individual greed include the Bernie Madoff Ponzi scheme of 2008, the Enron scandals of 2001, the financial crisis of 2007-2008 related to subprime mortgages, and the Wells Fargo fake account scandals of 2016. Greed is now a part of modern human nature, affecting everyone from sophisticated traders to individuals, Wall Street fund managers, bank executives, and even politicians and rulers.
I’m currently dealing with my own version of greed. I’ve had some success in recent months with day trading and investing in TNA and VOO. However, I’m now struggling with a significant fear of missing out (FOMO) by not having exposure to the bond market. November 2023 witnessed a massive bond rally, and as everyone anticipates that interest rates are at their peak and likely to decrease in 2024, the bond market is surging. Long-term treasuries have become more valuable as a safe haven asset due to lower interest rates. TLT has rallied from $82 to over $96 in just one month. I only captured some of this move.
The standard investing portfolio is typically a 60/40 allocation consisting of 60% allocation to stocks and 40% allocation to bonds. This allocation is commonly used for long-term investing as it aims to strike a balance between potential returns and risk reduction.
I’m contemplating whether I should sell some of my VOO or SPY holdings and invest in TLT and other bonds. This is a topic we discussed in the chatroom today.
Trading-wise, today was amazing. AMD and TSLA provided excellent breakouts, but the most important lesson we learned today was when Paras and Jarad both traded TSLA at the same time, and they posted in the chatroom in completely opposite directions. Both, as seen in my recap, were profitable and happy. This once again shows that the stock itself or its direction is not as crucial for trading success as trade and risk management. These are the keys to consistently becoming successful.
We also had a nice conversation about why we do not trade low-float, low-quality penny stocks that are prone to pump and dump, such as SERA today. It was a very constructive discussion, and I hope you watch my recap today.
Please let me know what you think in the comments section.
Tonight, we have a very important presentation by Dr. Kenneth Reid, our very own psychologist and performance coach, who is one of the most experienced trader psychologists we know. He has been in the market for almost 30 years and has a wealth of information and knowledge.
In tonight’s webinar, he wants to talk about another great performance coach, Michael Douglas, author of the well-known books “Trading in the Zoneā and āDisciplined Traderā. This webinar continues our exploration of the insights found in Mark’s first book, “The Disciplined Trader,” which was published after an intensely challenging period early in his trading career.
He lost his life savings but didn’t give up. Instead, he delved deep into his own psychology to untangle the distortions in perception that led to his financial crisis.
Dr. Reid will discuss Mark’s understanding of perceptual distortion and add a new concept to the mix that might help you make this topic very practical and accessible in your real-time trading. I can not wait to learn this from Dr. Reid.
Mike Douglas passed away in 2016, but his wife is continuing his work through new publications.
To your success,
Andrew
