The Casey Files:
Buying and Selling Thinly-Traded
From the Desk of...
Chairman, Casey Research, LLC
The International Speculator
August 5, 2005
article by Doug Casey, one of the world's most successful resource
stock investors, explains in simple terms one of the secrets
of his success. Pay attention carefully and the pay-off a month
or so down the road could be extraordinary. To find out all about
Doug's current favorite stocks - and about his highly respected
International Speculator newsletter - click click
Buying and Selling Thinly-Traded Stocks
Each day here at
Casey Research we speak to dozens of resource business professionals
in our quest for undervalued small cap companies exploring for,
or developing, gold, silver and other metals resources.
These companies, which are
followed in the International Speculator, currently offer some
of the greatest upside of any investment sector. But there is
a downside: the stocks tend to be thinly traded, especially in
the quiet summer months.
In a recent article by senior
editor Louis James, he tapped into the minds of one of my favorite
Canadian brokers for his thoughts on the nuances of buying and
selling stock in thinly traded markets. This article is particularly
relevant, as the companies we are buying today, in these quieter
summer months, should offer tremendous upside as the summer holidays
end and the junior resource markets come back alive. -Doug
To successfully navigate the
challenges of trading during periods of low volume, specific
approaches and strategies are required. Scott Hunter, of Vancouver's
Haywood Securities, shared a few thoughts on the subject.
Be Sure of Yourself
The first and foremost
thing to realize about thinly-traded stocks is that buying them
is a psychologically difficult exercise. Jumping into the market
when everyone else is running for cover is tough enough, but
to do so in the full knowledge that low volumes can make it difficult
to exit a position requires ironclad belief in yourself and the
companies you've chosen.
To make sure he believes in
what he's buying, Scott keeps a logbook in which he writes out
the "story" behind each company that he follows, noting
the pros, cons and reasons why he chose to put money into the
firm. After buying a company, he goes back to the log each week
to refresh his memory on why he believed his picks to be winners.
This, he says, helps to filter out nagging doubts that inevitably
crop up when the market gets ugly. Investors with such systems
can stay focused on their course to profits.
Picking the Bottom
One quality of thinly-traded
stocks is that they are more prone to sudden and rapid drops
in price, when nervous stockholders decide to liquidate positions.
This makes picking a time to enter the market even more challenging
than usual. A stock may fall considerably and then hold, looking
ripe for buying, only to plummet even further, leaving early
buyers out of the money.
Scott mentioned a few of the
signals that he looks for, to tell when a floor may have been
reached. In particular, he said to watch for a sudden increase
in the size of bids. If numerous blocks of 10,000, 20,000 or
even 100,000 shares are suddenly being tossed around, it's a
good indication that savvy investors consider the current price
band a good buy. Scott also noted that such buyers don't always
take their entire position in one bid. Watch for buyers getting
filled on a mid-sized bid and then immediately placing another
at, or near, the same price, indicating that the purchaser is
amassing a larger position at the current price level.
Of course, this is not a sure-fire
indicator that a stock won't fall further. And it's also a strategy
that works best for professional brokers who spend hours a day
watching the fluctuations of the market. But for those investors
with the time and means to keep a closer eye on a stock's daily
trading, this is one more piece of data that can be used to make
a Buy decision.
Like any market, the
quiet period will feature good and bad selling. "Good"
selling comes when a stock's price goes down for legitimate reasons-some
fundamental problem with the company or its assets that the market
recognizes. But there will also be a lot of "fear-selling"-quality
companies whose share prices dive for no better reason than shareholders
panicking at the overall state of the market and heading for
the exits-a phenomenon exacerbated by thin markets. But that
same phenomenon can increase the upside: such "excessively
undervalued" firms are the ones likely to bounce back to
higher prices, once the market recovers, yielding profits for
those who got in during the dip. Hence our frequent refrain of
"Buy on Weakness."
To spot opportunities created
by such fear-selling, look for stocks that experience a drop
in share price and then, several days later, undergo a larger-than-usual
volume of selling. This is a sign of spooked investors bailing
for no reason other than fear, and a prime time to acquire a
good company for cheap.
Increased buying or
selling volumes can swing a company's stock price dramatically
in thinly-traded markets. That is to say, if a holder of a large
stock position panics and decides to get out at any cost, they
may have to fill bids down to a very low price. Over the past
month, we've seen several companies in a position where $5,000
or $10,000 worth of selling would have driven their share price
down 30 to 50%.
In such a climate, you have
a shot at getting filled at ridiculously low bid prices. What
you do is place your "stink bids" at the low end of
the bid spread (which can be viewed using the "market depth"
function of stock-tracking services, or by asking your broker)
and then leave it on the market for an extended period of time
-you - may just catch a drop in the share price during a bout
of panic selling.
Another reason to bid low is
that thinly-traded stocks also work in the opposite way: substantial
buying can drive the price up quickly. Venture exchanges may
be the birthplaces of "irrational exuberance." Therefore,
savvy investors avoid buying at market prices and potentially
having to pay a premium for their final blocks of shares. If
you are in a rush to pick up some stock, it's often advisable
to make small buys and then wait for the share price to settle
back to lower levels.
Selling When No One is Buying
A way out for investors
in thinly traded markets who want to sell significant blocks
of shares when no one is buying is to call the company in question
and ask about doing a "cross". Many companies will
be more than happy to find a buyer who will pay a decent price
for shares when the alternative is to have desperation selling
drive the shares down, potentially triggering even further selling.
This is particularly true if the company has just completed a
financing and doesn't want those involved to become disgruntled
when their recent share purchases suddenly fall out of the money.
This approach is more likely
to be effective for those wishing to sell larger blocks of stock-50,000
or 100,000 shares. But for smaller companies, even 10,000 shares
can have a significant effect on the price and thus be enough
to make management pay attention. In any case, inquiring about
a cross requires only a few moments, and it may well end up saving
you thousands of dollars if you must sell when a stock you own
The bottom line here
is that you need to be more careful in a thinly-traded market.
That usually means taking greater pains to inform yourself about
the details of a stock's trading history. When you want to sell
shares in large company on the NYSE, you simply call your broker
and ask him or her to sell, whereas, even for the best companies
on the TSX-V, there are days when there are simply no bids. And
the reverse can be true as well. You should know what you're
doing and understand the possible consequences of an attempt
to trade-or work with a broker who does.
Thanks to Scott Hunter of Haywood
Securities in Vancouver (604-697-7116) for sharing his thoughts
with us for this article.
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