Having spent no inconsiderable effort in the defense of penny stocks, we do take issue with some of the reasons that investors are attracted to them. There is a common but flawed belief, for example, that lower-priced stocks will likely have larger percentage gains than their higher-priced cousins. This concept is demonstrated by a scenario where stock is purchased for $.10 and sold not so far down the road for $5.00, a whopping 5,000% return. The only problem here is that very few penny stocks will ever produce that kind of return. The odds that you will pick the one that does are probably commensurate with those of Lame Eddy winning the Kentucky Derby.

Then there's the "it's something that I can afford" syndrome. This one boils down to simple math: if you have $500, you can buy 5 shares at $100 or 100 shares at $5. Whether you end up with the 5 shares or the 100, your investment is still $500. (if you're thinking the $5 shares will grow more or faster than the $100 ones will, please re-read the paragraph above). The way to make good investments, to make money, is by acquiring quality, not quantity. For $500 you may be able to buy a greater number of shares of penny stocks, but you also have other, often preferable investment options. In our view, the person who has only a small amount to invest should be conservative, not speculative. Start small and be careful: your nest egg will not likely mushroom or dissolve, but will steadily grow as a result.

Lastly, there's the tendency towards speculation, investing with the expectation of turning a quick profit. Wanting to believe in such miracles is what enables bogus brokers to operate—they want you to believe too. In them. Avoid them like the plague. This is not hard to do if you rely on your own homework and not the word of anyone, however well-intended, for unsupported investment advice. We are not suggesting that you avoid penny stocks. To the contrary, we hope that you will be open-minded to everything and will always be responsible no matter where or how you invest your money. In our own personal portfolios we have many of the most well-known companies in America, including Berkshire Hathaway, Disney, Compaq Computer and McDonalds. We also have a fabulous selection of community banks as well as inactive securities like those from Walker's Manual of Unlisted Stocks. Penny stocks? Yes, we have them too!