When you first start researching the investing strategy for you, you’ll see hundreds of advertisements about “penny stocks.” As such, it can seem that penny stocks are the most popular investment strategy. While it’s true that they are the most advertised, that does not mean that they are the best and most successful long term strategy. As I love to do, I’ll compare penny stocks to dividend growth investing by using video game analogies.
Investing in penny stocks is the practice of purchasing stocks that have such low prices, that tiny price movements can mean massive changes in your balance. Dividend investing is all about finding high quality companies that distribute some of their profits to shareholders in the form of dividends. You try to find companies with a good history of dividend distribution increases as well. For more information check out my article on dividend valuation.
The dividend growth investor is patient, and willing to research every move they make to maximize success and minimize risk. I like to think of the dividend investor like Solid Snake. As you work your way through a compound of enemies, you slowly pick your targets and neutralize them without being compromised. Even if you make a mistake and trigger an Alert, you can rely on your past success to provide a safe haven and hide out until it’s safe to make your next move. Dividend investing follows a similar strategy, you pick a target, observe its strengths and weaknesses, and then make a move to buy it at the opportune time.
The penny stock investor is looking for a big payout within a short time with no regard for risk. Trying to win with penny stocks is like playing Ikaruga, it feels great when you’re doing well and working on that high score, but then it can all end in an instant. One thing goes wrong and you have to start all over again, and many times, it’s something you don’t even have control over. Penny stocks are the same, except there’s little skill, mostly speculation and gambling, and you can face immense losses when something doesn’t go right.
Your life isn’t a quick game of Ikaruga, it’s a long long game. On that long of a timeline, taking too many investment risks will not pay off. There’s a reason the smartest and richest investors in the world buy and hold high quality companies, because it works.