RULE #1
Buy them when nobody wants them
Buy a penny stock before a speculation cycle gets under way, such as early in its life cycle, when it is seasonally depressed, or when it is in the trough between speculation cycles. We buy before promotion starts or a positive industry consensus develops. Bottom-fishing is truly contrarian in that almost everybody thinks you are wrong.
RULE #2
Buy a basket to diversify away the risk
Always diversify a bottom-fish portfolio. While we think our bottom-fish have potential for 500% or better gains, each stock is vulnerable to the TROCL risks: timing, reorganization, opportunity cost, catastrophe and liquidity. On its own each bottom-fish has a high failure risk and a big reward potential, but as a group they have a reward potential that outweighs their collective failure risk.
RULE #3
Don't be a top picker
Always sell some too soon, some too late. Everybody dreads making a mistake. When we sell too soon we correct the mistake by doing something foolish. When we miss the top we deny the mistake. The dread, not the mistake, is the enemy, so we pre-empt the dread through a strategy that guarantees we will almost never get it right. Some we will sell too soon, some too late, and at the end of the day it will average out into a nasty tax bill. We believe in the speculation process, not the story's happy ending.
RULE #4
Divorce your winners
Never buy back a sold position
unless the speculation cycle is over, a bottom has developed, and signs of a new speculation cycle are evident. We don't think we are clever enough to trade stocks, are too busy with real jobs and lives to monitor markets constantly, and know our enemies are gambling impulses and our emotions. Momentum trading is an addiction with the familiar motto "I know when to stop." Bottom-fishing has its good and bad periods, but it never wipes you out if you stick to the strategy.
RULE #5
Don't chase other winners
Re-invest profits in other bottom- fish. Jumping onto a momentum play and riding it higher is the natural impulse after a big win, but we resist the temptation. As we take profits on bottom-fish undergoing a spec cycle we reinvest them in other "boring" bottom- fish, or sit on the cash if good bottom-fish are scarce.
RULE #6
Know why you own it
Always have a reason for buying or holding a stock and periodically check if that reason is still valid. Not knowing why you own a stock, and why you profited or lost through it, gives you the same degree of control over your financial destiny as enjoyed by ocean flotsam. Without some sort of expectation and time-frame, you cannot manage opportunity cost or your risk/reward exposure.
RULE #7
Read between the lines
Talk to management to get a better grip on the story and a feel for the company's "voice." Anything in print is history, and very quickly so if the source is credible. You must take responsibility for tracking your bottom-fish and verify your expectations and timeframes with management. Don't look for inside information, because if you get it and act on it, you are breaking the law. But the law does not forbid you to listen to the tone of insiders and read between the lines. The "voice" is not a reliable input for buying decisions, but it is a valuable resource for selling decisions. Don't worry that you are not a technical expert. With skillful questioning you can prompt most insiders to reveal any red flags.
RULE #8
Spend some of the profits on real things
Regularly pull money out of the bottom-fishing account to set aside for future taxes or purchase hard assets. The impulse to let it ride is powerful. But most bear market cycle shifts are recognized only in retrospect. Do not get caught with unfunded tax liabilities, and don't forget that the purpose behind investing is to make money to buy real things, not end up with a great big pot of paper wealth.
RULE #9
Don't mix bottom-fishing and trading
Apply the bottom-fishing strategy in a special account and do your trading elsewhere. Nobody can perfectly resist the temptation to take a flyer. But each flyer is a slippery slope for the bottom-fishing strategy. Physical separation is the best protection.
RULE #10
Be open-minded
Never believe you know or have seen it all. Certain structures in the speculative market never change, but the form and scale in which they manifest themselves do change. By the time we have figured out how something works, the rules are probably changing. Open-mindedness and flexibility combined with cautious skepticism is the best attitude for bottom-fishers.
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