Let's gamble! My penny stock strategy explained...

When it comes to the stock market, i generally think it's best to follow warren buffets advice of investing in an S&P 500 ETF like the Vanguard 500 Index Fund ETF (Symbol: VOO). In my opinion it's a great longterm option for retirement that requires almost no effort and has proofen to be safer, cheaper and more lucrative than most alternatives in the past. Especially since most investors and investment managers can't beat the S&P 500 in the long run. Unless you've got insider information i would not even bother try. (And that would be illegal)

While this is great, the problem is that the S&P 500 only returns 10% per year on average. In some years you might even end up loosing money. So it takes a long time to really make bank. But in case your greedy and impatient don't worry. 😄 The stock market offers many different ways to potentially generate way higher returns than the S&P 500 and in a much shorter period of time. The downside is that this usually comes with way more risks. But if you're willing to take some chances: Here's what i do if i feel like gambling...

So what i'd like to do in this case is looking for penny stocks (or really cheap 1-2$ stocks).

Why penny stocks? Well because they tend to fluctuate in price way more and faster than higher priced stocks. This results in higher possible gains but also risk. You be also more likely to find something with lots of potential yet so far overlooked by the general public when dealing with penny stocks.

I'm personally looking for those penny stocks that meet the following criteria:

• The company has been around for a long time (At least 10 year chart history)
• The stock price was way higher in the past (At least where you want it to be again)
• You think the company will not go bankrupt
• You fully analysed and understand the business
• You think the stock price has the potential to go up massively within the timeframe you plan on holding the stock

Now you have to define "potential to go up massively" and "timeframe you plan on holding the stock" for yourself. I'm personally hoping for at least a 5x (ideally much more) and within 5 years max. (Ideally within months) when using this strategy. Obviously that won't happen with many of the stocks you buy and sometimes you might end up selling for a lower profit, to break even or even at a loss. You might hit it big with 1-2 stocks or decent as a group so you can afford to loose on a bunch of others. At the end of the day you're basically trying to win more than you loose.

Of course you could ignore the first 2 criterias and buy into new businesses without any history. But this is even risikier since most new businesses fail. Yes businesses that exist for decades can also go bankrupt. But the risk is lower, especially if you're doing your homework.

Important: Do not cash out just because you lost half your money, your set timeframe is over or there is a recession etc. If you cash out early there must be a very good reason for that. (Backed by numbers/facts not stories) So the media/experts saying there is a market crash coming isn't a good reason to freak out and sell.

Tip: Stock screeners make it easy to find qualifying stocks. I like to use the free screener over at tradingview.com. Just apply some filters and go through the results. It's that easy!

Conclusion

This strategy is not as short-termed or risky as daytrading. But it's still a high risk strategy with matching high possible rewards in a comparably short period of time. I would not recommend you use this strategy with non disposable money. You may want to try it with a paper trading account instead of using real money first. If you hate risk, i would buy an S&P 500 ETF instead.

Disclaimer: I'm not a financial advisor so this is merely my personal opinion and not to be seen as financial advice. You have to do your own due diligence when making investments and you're the only one responsible for the outcome of such investments.