Why Buying Bad Penny Stocks (Saham Gorengan) is a Bad Idea for Recompound
In this article, we are inviting our audience to be in our shoes, Recompound, as a service provider. Our goal is to make our clients profitable in a consistent manner, month on month.
Because of our performance based subscription fee, if the portfolio value of our clients do not hit an all time high value, we will not be eligible for payment.
As a prospect or current client, if you are wondering, let us dig deeper into the responsibility of Recompound as a service provider.
Before we start, lets clearly define what a gorengan stock is
A stock that is smaller in size (most usually with a market cap of less than IDR 1 trillion) that is prone to very volatile price movement, but does not have a future prospect.
In this article, we refer bad penny stocks as the company that is consistently not performing well with bad management with no signs of turning around. However, the company might want to artificially jack up the price to achieve other agenda such as corporate actions, getting loans, etc.
Economics 101: Demand and Supply
At its core, the stock market comprises of buyers and sellers. If there are more buyers than sellers, the price would go up. The contrary is true if there are more sellers than buyers at one point, the price would go down.
So theoretically and practically speaking, if you want to achieve consistent growth at the stock market, you have to repeatedly purchase stocks in anticipation of more buyers that are willing to buy at a higher price (assuming the company does not issue dividends) and then sell before more sellers are willing to sell at a lower price.
The Case of Bad Penny Stocks (Saham Gorengan)
Now assume that one entity, Pak XYZ, has a large enough money (IDR 100 bio) to pump a bad penny stock.
Pak XYZ would generate a demand to purchase a large number of stocks. Naturally, when the demand exceeds the supply, price would go up using the law of demand and supply discussed previously.
A bad penny stock, generally speaking, has a low transaction volume (bid or offer). This means that if Pak XYZ has a lot of capital, he alone can theoretically create a drastic price appreciation to the target price that Pak XYZ has in mind (lets say IDR 200 from IDR 100).
Assume that we know that Pak XYZ wants to buy a stock with his IDR 100 bio. Then we inform our clients namely a, b, c, …, n about the stock while the price is low.
Collectively perhaps a, b, c, …, n has a position amounting to IDR 10 bio. After Pak XYZ purchases the stock, the price increases from IDR 100 to IDR 200. Our clients would have handsome 100% increase.
With this price at the end of the month, Recompound would incur a fee to a, b, c, …, n based on the “good” performance of the stock. However, little that we know after the IDR 200 price is hit, Pak XYZ has to exit his position.
A bad penny stock usually has the following attributes:
Unprofitable business (no dividend)
and therefore there is little to no reason for any rationale market participant to buy that stock at artificially high prices. This is especially true when there are other good undervalued companies as alternative investments (opportunity cost is also a cost).
When Pak XYZ exits his position, which is IDR 100 bio worth, the stock price would drop because there is simply no reason to buy the stock (no demand). If the stock goes down from IDR 200 to IDR 80, after Pak XYZ exits, Recompound’s clients would be down 60% from their portfolio’s all time high value.
This means that for Recompound to be eligible for payment in the next month, Recompound has to 2.5x the performance of the current portfolio (250%). That is incredibly difficult to do. Based on the latest data, it takes us about 8 months to generate roughly a 25% growth. So we would need approximately 80 months of effort to break the previous all time high. That’s almost 7 years of effort. Imagine doing 7 years of work, paying your employees, paying for rent, etc etc for no income.
So understandably, in fulfilling our interest of making Recompound a sustainable business, buying bad penny stocks that have no prospects is an incredibly huge risk.
Furthermore, buying bad penny stocks with no prospects runs contrary to Recompound’s intention to help people invest. When we buy bad penny stocks, no matter who we are, we are not investing but we are speculating.
We are speculating that:
Someone else would be foolish enough to purchase the stocks at a much higher price because
that foolish person would believe that there is another foolish person to buy at a higher price,
and so on until we run out of foolish persons and the price would collapse.
To conclude, we are hopeful that this article sheds light on why it is not in the interest of Recompound to purchase a bad penny stock. Doing so is extremely risky for a business provider that is performance based like us. What a legitimate business provider would always strive for is sustainability of its business by mitigating risk and building trust client per client, consistently.