The danger of penny stocks (and a comically large amount of fictional money) with our fictional friend Peter

 Depending on where you get your investment news and suggestions from, you’ve probably heard one of two sentiments, a lot. Either you’ve heard “buy [this stock you’ve never heard of] right now!!! It’s so cheap and it’ll make you a fortune when it inevitably rises 47x in value over the next month! Put your life savings here!!!” Or you’ve heard “The people who just told you to invest in [the stock you hadn’t heard of until 30 seconds ago] are going to ruin you if you don’t pay attention!!! Run away while you can!!”

In the case of penny stocks, I’m in the second camp, but the argument I’m going to make isn’t emotional at all. I’m simply going to log into my brokerage portal, find the “biggest winners and losers” widget (which almost always is filled with these dangerous penny stocks), and show you what would have happened, had you invested in these.  

Get ready, because this isn’t going to be pretty.

These stocks were on my (real) widget as of the end of the (real) trading session yesterday:

Symbol	Name	Price now	Date went public	Total change since then	Annualized change	Change just today
MOB	Richmond Honan Medical Properties	2.76	August 26, 2022	-16.08%	-18.23%	+82.67%
EVLO	Evelo Biosciences	3.23	May 11, 2018	-98.99%	-58.9%	+41.13%
NEON	Neonode	4.84	August 19, 1983	-99.92%	-16.35%	-34.11%
PWM	Prestige Wealth	25.97	July 7, 2023	+366.67%	+ Several trillion trillion trillion trillion %	+32.01%
XELB	Xcel Brands	1.13	June 3, 2004	-98.88%	-20.95%	-13.89%
NSTG	NanoString Technologies	4.91	June 28, 2013	-45.00%	-5.78%	+18.92%

So let’s say that Peter, having seen this part of my investment dashboard, decides to invest in these six stocks, to the tune of $10,000 each.

For these examples, we’ll look at 3 scenarios:

1. What would have happened if Peter had bought when the stocks went public, and we looked at those returns from then until now?
2. What would happen if Peter had bought them now, historical returns continued for a year, and we looked at them in a year?
3. What would happen if Peter bought them now at age 22 just out of college, and left them alone until we looked at them, assuming their historical returns continued the whole time, until when Peter retires in 45 years at age 67? 

Ticker-symbol PWM’s growth over just a few trading days has been meteoric. Nearly-400% growth just since Thursday (today is Monday)  means that, for instance, $10,000 invested when it went public last week, would become, should the growth continue at this rate until next July, the equivalent of a few trillion trillion years’ worth of the US’s GDP, gained by one single individual, thanks to one stock, in one year. Very few things in personal finance are certain, but this is one of them: putting $10,000 into the stock of this new wealth management company will not see you become hundreds of trillions of trillions of times richer than Elon Musk is right now, by this time next year.

And at this rate, if Peter bought in, to the tune of $10,000 when the stock went public, as we laid out, and didn’t touch that position for his whole 45-year career, assuming—for the sake of the comedy, at this point—that the last 3 days’ returns continue for the next 45 years, Peter would accumulate… wait for it: somewhere on the order of 1-followed-by-10 trillion-trillion-trillion-trillion-trillion-trillion-trillion-zeroes, dollars.

No, I’m not making that up. The math really does work out to such large a number. And, lest any of you readers try to emulate Peter, no, that will not happen.

These returns are really that absurd, and no company, not even the company with the best management team, the best product, the best national and global economies, and literally every other parameter in the whole universe tuned perfectly, could manage that much growth, for that long, to make that much money.

So as bad as this would be for the performance of this hypothetical portfolio made up of the market’s biggest winners and losers today, we’ll consider only the 5 stocks left after PWM is stricken from the list, to get a much more realistic picture of the returns (read: losses) that throwing all your eggs into a basket of those remaining 5 would give you, and how dangerous that can be.

Given we’re striking PWM for its absurdity, this is what the table above now looks like:

Symbol	Name	Price now	Date went public	Total change since then	Annualized change	Change just today
MOB	Richmond Honan Medical Properties	2.76	August 26, 2022	-16.08%	-18.23%	+82.67%
EVLO	Evelo Biosciences	3.23	May 11, 2018	-98.99%	-58.9%	+41.13%
NEON	Neonode	4.84	August 19, 1983	-99.92%	-16.35%	-34.11%
XELB	Xcel Brands	1.13	June 3, 2004	-98.88%	-20.95%	-13.89%
NSTG	NanoString Technologies	4.91	June 28, 2013	-45.00%	-5.78%	+18.92%

We’re left with 5 stocks of the day’s 6, and while these returns will be bad, they won’t be that extreme.

Scenario #1 gives us the following:

• MOB would have gone down from $10,000 to $8,392
• EVLO would have gone down from $10,000 to $101
• NEON would have gone down from $10,000 to $8
• XELB would have gone down from $10,000 to $112
• NSTG would have gone down from $10,000 to $5,500
  

So in Scenario #1, having bought when these stocks went public, Peter would have started with a total of $50,000 and ended with $14,113, meaning he would have lost 71.77%

Scenario #2 gives us the following: 

• MOB would go down from $10,000 to $8,177
• EVLO would go down from $10,000 to $4,110
• NEON would go down from $10,000 to $8,365
• XELB would go down from $10,000 to $7,905
• NSTG would go down from $10,000 to $9,422

So in Scenario #2, if Peter bought now, and the average returns of the past continued for a year, Peter would have started with $50,000 and ended with $37,979, meaning he would have lost 24.04%

Scenario #3 gives us the following:

• MOB would go down from $10,000 to $1.17
• EVLO would go down from $10,000 to worthlessness
• NEON would go down from $10,000 to $3.24
• XELB would go down from $10,000 to $0.25
• NSTG would go down from $10,000 to $686.18

So in Scenario #3, if Peter bought now, and the average returns of the past continued for his whole 45-year career, Peter would have started with $50,000 and ended with $690.84, meaning he would have lost 98.62%

It's unheard of for a trusted single stock, like Apple, or Netflix, or Boeing, to go up 60, 70, 80% even on the best days in those companies' histories. Indices, like the Dow, or the S&P500 would never have that kind of movement, either. Trusted stocks and indices, similarly, wouldn't lose that much in a day, either. So just as we talked about bonds being generally more conservative than stocks because they're less risky and offer a smaller reward, the same can be said about trusted single stocks and indices as compared to these penny stocks. 

 There is way too much risk involved to accept the slimmest of possibilities that one of us might end up the next Elon Musk by betting on one of these stocks. One of the ones we looked at is probably going to be worthless in a few decades. 

Investing regularly, even with small amounts into index funds and trusted companies, is a much, much, much,  better strategy, with a much better likelihood of long-term positive returns, without the constant stress of seeing your net worth 10x one day, then get cut by a factor of 20 the next day.