Expert Interview with Timothy Sykes on Penny Stocks

ThinkstockPhotos-101842482 (1).jpgAre you looking for an out-of-the-box way to invest that, if done correctly, could make you a lot of money? Then pay close attention.

Upon first glance at Timothy Sykes' website, the words "penny stocks" are centered in bold. Some might see those words and flashback to Leonardo DiCaprio's portrayal of Jordan Belfort in 2013's The Wolf of Wall Street, where in one of the opening scenes he uses penny stocks to fool an unwise investor into an irresponsible purchase. But in reality, trading penny stocks is not like The Wolf of Wall Street. Not even a little.

To explain the difference and tell us who should invest in penny stocks, Mint caught up with expert investor Tim Sykes of TimothySykes.com.

Are misconceptions about penny stocks common? Where did they begin? Ninety-nine percent of the civilized world hates penny stocks, because 99% of penny stocks are scams or are destined to fail. Despite the incredibly terrible odds of success, these low-priced stocks are marketed and promoted as "the next Microsoft" or "the next Exxon" by insiders and promoters to those struggling financially. Because of the alluring low stock prices and lotto-like mindset of most lower income people, many give into the hype-filled propaganda and marketing and are destined to lose most or all of their investments in penny stocks, thus creating widespread hatred of this niche.

How do you combat these misconceptions? Low-priced stock scams, hype and manipulation are nothing new; but I've made millions of dollars mostly by betting against such scams via short selling. Short selling enables you to profit from the failure of these companies and their stock price crashes, thus making my strategy overwhelmingly logical and profitable. I bet against hyped up and manipulated stocks when their values reach ridiculous levels, and then wait for the stock prices to crash as insiders and promoters sell their shares at the artificially pumped up prices.

"Pump and Dump" is something most people wish to avoid. But not me, since every new pump offers an opportunity for me to bet against an investment that I know has a 99% probability of crashing and burning. The key is understanding that it's not an exact science and you can't know exactly when the crashes will happen, which is why I don't win every time - only roughly 75% of the time.

You could say that my strategy is the inverse, and is similar to the rational and successful strategy of buying quality companies at undervalued stock prices. We both wait for the market prices to catch up with reality; mine is just the opposite of what most people ever consider.

Who is your ideal client and why? My ideal client is anyone who has ever lost on penny stocks because they didn't know the rules of the game. Unfortunately, most people only find out about my strategy after their penny stock has crashed and they start searching the Internet to better understand what happened.

Also, anyone who goes to casinos and gambles because they don't know that penny stocks, when understood and traded correctly, offer higher odds of winning than any casino game ever will. Because penny stocks are better suited to small accounts rather than large ones due to their illiquidity, anyone with a few hundred or thousand dollars who wants to grow their nest egg exponentially, rather than waiting 30-50 years to get wealthy using mutual funds and diversification, is a potential client of mine.

As crazy as it sounds, I turned $12,415 into $1.65 million in my first 4 years of trading penny stocks, and now my top student Tim Grittani has also turned a few thousand dollars into $2.5 million in just 4 years. Obviously, not everyone will have that kind of success, since we both traded thousands of times to achieve our success and averaged just over $2,000 in profits per trade; but at least my strategy does offer this incredible upside potential, whereas it's statistically impossible for any mutual fund or diversified portfolio to achieve such gains in such a short period of time.

Is there a minimum required investment for someone looking to make an impact in your industry? Yes, my students need at least $2,000 in a brokerage account in order to short sell stocks, although many of them prefer to just buy quality penny stocks in the beginning while learning how to short sell. In that case, the minimum required to open a suitable brokerage account is just $500.

Everybody wants to make as much money as quickly as possible, but I tell all my students that their goal for the first few months should be to learn the rules of the game and to get used to the volatile patterns. Even my top students lose quite often in the beginning as it takes time to adjust to such a strange strategy.

The good news is the studying and adjusting is very front-end loaded; and within a few months or years, you get into a groove of buying quality penny stocks with solid news like earnings wins or contract wins, and short selling penny stock scams that have been pumped up and appear likely to crash.

Unlike other more popular and liquid market niches, there aren't quality penny stock plays every day; but if you are prepared, play by the rules, have patience, and strike whenever the proper setups appear, the odds of success are great since good news has legs for days and scams always crash eventually.

In your opinion, are penny stocks for everyone? Why or why not? No. They are definitely not for everyone as these stocks move quickly; and if you're not able to trade in and out of them every few weeks (or even every few hours or days), you risk these volatile stocks getting away from you. My rule #1 is cut losses quickly, and if your ego gets in the way and you let small losses turn into large ones, it will open the door to disaster. Because I trade in such a volatile niche, I trade very conservatively. Those who are too aggressive and swing for home runs learn the hard way that hitting singles and doubles is best for growing a small account gradually.

Also, there's no point in anyone worth over $20 million trading penny stocks because even the top penny stock traders in the world only make a few million dollars per year. It's just not worth the time for anyone who is already that wealthy.

That said, penny stocks are great for lower and middle class people who are looking for an alternative strategy to growing their small accounts using the sector's volatility and low barrier to entry to their advantage. The promoters and insiders, and even most penny stock traders and investors, aren't very smart; and breaking news influences stocks for days and weeks, not just minutes and hours. So there is tremendous opportunity for anyone willing to learn and trade the hottest penny stocks when they have the right news and chart patterns.

On your website, you talk about receiving $12,000 in gifts from your bar mitzvah and turning that $12,000 into an impressive $2,000,000. That's amazing! Who taught you how to invest? I've actually grown my penny stock trading profits to over $4.2 million. It's been an incredible journey, especially because I'm from a middle-class background and am entirely self-taught. Remember, most of the world hates on penny stocks and I never intended on "getting stuck" in this niche; but after nearly two decades of trading in this wild sector, I've realized this is what I know and my experience gives me an advantage.

Over time, I've refined my rules and lessons, and now my goal is to be the mentor to people that I never had. Despite my efforts, there's still much misinformation regarding penny stocks, and I've only made a small impact in the past 8 years since I began teaching my strategy publicly. I already have a few millionaire students, but it'll likely take hundreds or even thousands before people begin taking my strategy and teachings seriously.

Finally, you mention "full transparency" in your orientation video stating, "It's not just about making money. It's about being honest." What does that mean exactly? Why is that such a vital part of what you do and how you deal with your clients? Most traders and investors who have made millions in the markets don't publicly disclose their exact strategies, and definitely don't disclose their specific income year in, year out. This widespread secrecy has created a "financial dark age," especially in the world of trading education, where all of the most successful people keep their mouth shut and continue to bank without passing down their lessons or secrets to anyone else.

I understand it's taboo to talk about how much money you make, and successful people don't want to divulge their "secret sauce" for fear of it ending. But if we're going to change this questionable industry - not just penny stocks, but the entire trading world for the better - it starts with full transparency and the understanding that the money we make is like our batting average, which should be made publicly available.

The phrase "past performance is not indicative of future returns" protects everyone legally, but can you imagine going to a baseball game, looking up at the scoreboard for a batter's batting average and seeing a disclaimer "past batting is not indicative of future hits?" No, of course not, and that's why baseball is our national pastime; while the trading world, and specifically millionaire traders like me, are looked down upon by society as something very questionable.

I have nothing to hide. I'm proud of my profession and journey, and I want to inspire, teach and create more millionaire students. So I show everything including my private jet rides, trips, exotic cars, homes, audits, specific trade results, and even my tax records. This is just the beginning of the financial education renaissance; and thanks to the Internet, transparency is pushing everything forward.

Follow Timothy on his Google+ page.