The following is a guest blog post:
You don’t get to be classed as an investment guru without doing more things right than wrong with your stock picks, and Warren Buffett has been producing solid returns for his followers for many years.
His trading techniques are legendary and if you can apply his stock-picking philosophy to the world of penny stock day trading, you might give yourself a chance of emulating his success.
If you want to check out how your penny stocks are faring, visit Money Morning for the latest figures. In terms of sorting out which penny stocks to pick, here is a look at how to interpret some of the words of wisdom from the Sage of Omaha.
Keeping hold of your money
Probably the most famous advice offered by Warren Buffett, who is the fourth wealthiest person on the planet and therefore seems well placed to know about holding onto his money, is you should always aim to never lose money.
His infamous number one rule is to never lose money and this is swiftly followed by rule number two, which is to never forget rule number one. You get the gist. He understands that you are gambling to a certain extent every time you invest in a stock, but adopting a cautious mindset can help keep the odds more in your favor.
Buffett is only human like the rest of us and he does lose money on some of his trades. However, the fact that he manages to win about 75% of the time overall, demonstrates the importance of staying in the game over the longer term by only committing a small percentage of your portfolio on any one trade.
Going all in on red or black is not the sort of high-risk strategy that you could ever expect Mr Buffett to use. It is much more a case of putting yourself in a position of limiting your losses when you do lose, and if that means missing out on a few potential trades that turn out to be winners, so be it.
Forever a bear
Adopting a permanently bearish perspective has been the path to profits for Buffett and it therefore makes sense that if you are going to trade penny stocks or any other stock for that matter, you should follow his lead.
If you are ultimately going to be aiming to make dollars out of penny stocks, you have to expect that these small companies are operating in volatile waters and therefore they can quickly fall in or out of favor with investors in the blink of an eye.
The classic scenario would be a penny stock that is developing a potential cure for a disease like cancer. If their trial results look promising, the stock could quickly soar in anticipation of great success ahead, but if the results are negative or there is an unexpected delay, the stock price could quickly tank as investors flee what they see is a sinking ship.
Having a bearish outlook in such a high-risk environment as penny stocks is not exactly what you could consider the ideal approach on the face of it, but how it can help you is to limit your exposure to each individual opportunity.
If the stock bombs, you haven’t lost too much of your portfolio and you live to fight another day. If the stock rises into the stratosphere, you will have made a profit. Maybe not as much as you would have liked, but slow and steady wins the race and back more winners than losers over a spread of penny stocks and you will have made a nice profit without risking it all on only a handful of stocks.
Optimistic and cautious
For the majority of investors, even being half as successful as Warren Buffett with their investments would be more than enough, so the overriding lesson to take from the great man, is to be optimistic about your chances of success but temper that enthusiasm with a fair degree of caution.
His view seems to be that it is largely irrelevant what kind of market you are trading in, provided you are working to a strategy and stick to it and also understand that you will have some losers amongst the winners, then you are on your way to emulating the same approach used by Warren Buffett, that has seen him stay ahead of the field for so many years.
Dominic Banks writes about trading stocks and shares for a selection of investment and personal finance blogs. He started out with penny stocks several years ago and is happy to share his thoughts and tips.