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  Canada Immigration Forum > About Canada > Business > Interested in penny stocks? Here's a warning!
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Interested in penny stocks? Here's a warning!




In this issue:
» Dr. Doom favours Indian banks, real estate
» BRICs seeing big money flows
» Indians leaving their mark on corporate US
» Wall St. bankers got it all wrong, and so did their teachers
» ...and more!!

Have you ever heard of Avance Technologies, Kaleidoscope Films, or G-Tech Info? We didn't, that is until today. As we were looking at some of the best performing stocks of 2009 across all categories, we came across these and were amazed to see their 12-month returns that ranged between 500% and 2,500%!

All these stocks are part of the category we know as 'penny stocks. Penny stocks are those having share price in single digits or low double digits. And seeing their returns, we can say for sure that these stocks are back in the limelight!

Investors' interest in penny stocks is not difficult to understand. Most large, mid and small cap stocks are back to trading at high valuations. As such, the 'cheap' valuations of penny stocks are acting like bait for investors in search for new stock ideas.

And if you are amongst those lured by the dirt-cheap valuations of such stocks, here's a word of warning. Penny stocks can become even cheaper as there are little or no earnings or track record to back whatever valuations they enjoy. While these stocks might record big gains within a short period (as seen above), these gains are largely owing to extremely low liquidity rather than any fundamental reasons.

So the next time someone tips you to buy those 'hot' penny stocks, remember that he might be looking for a bigger fool to buy his holdings in such stocks - many of which are just worthless pieces of paper!

00:59 Chart of the day
Today's chart of the day shows a comparison between annual returns of Indian and US stocks versus gold (denominated in Indian rupee). And clearly, Indian stocks and gold have outperformed US stocks over the past 10 years. A mix of good economic and corporate performance has titled the balance in favour of Indian stocks. As for gold, investors have lapped on to the yellow metal fearing a collapse of the US dollar, which is now looking a near certainty!



Note: Indian rupee denominated gold prices used for calculation
Data source: Prowess, Yahoo Finance, Gold.org

01:27

Investment guru Marc Faber has always been known for his independent and bold thinking. No wonder then that it is always interesting to know his take on investments. Especially when the crowd is so often turning out to be wrong. Thus when in a recent interview he listed his top contrarian picks from across the world for 2010, we were all ears.

Among other things, Faber is very bullish on the banking and real estate sector in India. He believes that banks in India did not play in the CDO (collateralized debt obligations) market and mortgage backed securities market. So for the banks that are well run, there is a huge opportunity. As for real estate, he sees urbanization accelerating at a fast clip in India. There will be entirely new cities coming up. So there too he sniffs big opportunity in Indian real estate over the long run.

While we must say that India's scope for development does hold a lot of potential for these sectors, making sure that one invests in fundamentally strong companies at the right valuations is of utmost importance.

02:11

BRIC nations - Brazil, Russia, India, and China - are seeing a higher share of global investments coming their way. This is if one is to believe a report on a leading business paper today. The report cites EPFR Global a tracking agency for global fund flows. Its stats show that BRIC-focused equity funds have already seen inflows of US$ 20 bn during the first nine-months of this year. Importantly, this is almost 40% of funds of all emerging market stock funds.

Such large fund flows into BRICs are not without reason. Stockmarkets in these countries have risen sharply over the past 12 months. The MSCI BRIC index is up almost 90% in 2009 as compared to 70% gains recorded by the MSCI EM (emerging markets) index.

Apart from the promise of better returns, and as compared to developed markets, the BRIC economies also promise a better economic future for the coming few years. India is one clear case in point here. And if one has this conviction that the coming decades are going to be extremely bright for India and stays invested in the right kind of stocks, he will be glad that he pulled the trigger.

02:59

Anyways, Indian markets traded strong today. The BSE-Sensex was trading with gains of around 480 points (2.9%) at the time of writing. The BSE-Midcap and BSE-Smallcap indices also followed suit, trading with gains of 1.4% and 1.5% respectively. Energy and IT stocks led today's gains in India, which closed as the best performer among all Asian markets.

Gold is trading marginally lower. The metal has now touched its 7-week low of around US$ 1,086 an ounce owing to a rising US dollar.

03:19

When it comes to criticizing Wall Street investment bankers, there may be few adjectives that have been spared in the last twelve months. However, it seems that the bankers are not the only ones to be blamed. Their alma mater has also got it all wrong when it came to judging risks. 'How to invest profitably' is not a lesson that only the bankers need to learn. The school that produces most of the Wall Street honchos has been one of the biggest victim of poor risk management.

We are referring to one of the most renowned business schools in the world - Harvard Business School. To fund its expansion plans, the school invested in interest swaps. In December 2004, the institution bought swaps on construction bonds worth US$ 2.3 bn. The Fed rates were then 2.25%. With the Fed slashing interest rates to near zero, Harvard University has had to bear losses of a staggering US$ 1 bn.

The crisis has taught some very important lessons. To the bankers and to their teachers!

03:57

It appears that Indians are leaving their mark on corporate US in more ways than one. Forbes has come up with a list of what it calls 'Eight Indian Flavoured CEOs'. It highlights how US immigrants of Indian origin have managed to get into the boardrooms of capitalist US. It shows how they are at the helm of affairs of corporations that rule the world.

Some names from the list that make India proud are Indra Nooyi (PepsiCo), Vikram Pandit (Citi), Francisco D'Souza (Cognizant) and Shantanu Narayen (Adobe) among others. However this number is still negligible in context of the huge immigrant population of Indians out there. Nevertheless, it is much better than zero a decade back. In short, Indians are making great headways towards ruling global corporations. Also they are fairing much better than the other immigrants in the US!

04:27

Food inflation may be giving consumers, government and the central bank sleepless nights. But the deputy head of planning commission, Dr. Montek Singh Ahluwalia is very sanguine about bringing it under control. Rise in food prices that has been to the extent of 20% YoY in recent days has played havoc with the average consumer's budget. The same has been particularly worrisome given the draught like situation this year. However, Dr. Ahluwalia believes that most of the price rise is speculative in nature.

He expects food supply to catch up in the coming months thereby bringing the inflation under control. However, we believe that lower crop yield, shift to cash crops and higher income in rural areas is unlikely to bring the prices lower anytime soon.

04:54 Today's investing mantra
"All investment evaluations should begin by measuring risk, especially reputational." - Charlie Munger

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The best way to find yourself is to lose yourself in the service of others.”
Mahatma Gandhi

 
gopalpai

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