How to build and invest in a “secret weapon” – part one

Two weeks ago, I shared with you an email I’d just sent to the subscribers of my subscription newsletter.

Two weeks ago, I shared with you an email I’d just sent to the subscribers of my subscription newsletter.

In that email, I made eight big claims about a new strategy I’d uncovered. So this week, I want to talk some more about the strategy. I want to show you how it works, why I’m so convinced about it, and how I’m going to put it to work for my subscribers.

Here’s what I said about the strategy last week. It tells you the four specific qualities of superior penny shares:

  • It harnesses the “small company effect” to aggressively boost your portfolio’s returns if used correctly
  • It spots “junk” shares, the toxic penny shares which ruin your returns
  • It saves you money on brokers fees
  • It finds companies in many different industries, which helps you “spread the risk” and leaves you less exposed to a downturn in one industry
  • If you choose, it allows you to feel confident ramping up your risk level to make more money
  • It helps you invest in high-octane “growth companies”
  • It profits whether the FTSE is going up or down

So how does this strategy work?

Make out like a bandit

It’s all to do with what financial nerds call the “small company effect”.

The small company effect is a simple idea. It simply means that investments in the shares of small companies outperform investments in the shares of big companies. Basically the smaller the companies in your portfolio, the greater the returns should be.

It’s a really important idea because the effect is so big. The numbers are just staggering.

Let’s say you invested $1 in the US stock market in 1955.

  • If you put it into large companies, you’d have made $3,919 by 2013.
  • If you put it into small companies, you’d have made $29,400.
  • And if you put it into the smallest companies – the penny shares – you’d have made $48,090.

And the numbers are similar for the UK. That’s the small company effect. That’s the power of investing in small companies with big ideas.

The small company effect is a godsend for ordinary investors. It means that, if you’re okay with taking more risk, it’s possible to make out like a bandit by investing in the stock market.

At this point you may be thinking “this all sounds great… but how does it work in practice? That’s a valid point. Because, as any penny share investor can tell you, there’s a lot more to it than simply chucking money at small company shares.

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A slippery bugger

So far I’ve only told you half the story when it comes to the small company effect. There’s tonnes of evidence that it exists… but, for lots of reasons, it’s been hard for ordinary investors to “grab a hold” of it.

To name a few of these problems: the small company effect seemed to be concentrated in shares which were expensive to trade; it seemed to be concentrated in a few very tiny companies; it seemed to appear in January and disappear for the rest of the year; it seemed to be concentrated in “value stocks” and not in growth stocks; it seemed to disappear for long periods, and it seemed to only appear in certain countries.

Those are some serious problems! Serious enough that many investing nerds were starting to dismiss the small company effect altogether. They thought it was sort of an illusion, a weird inexplicable quirk in the history of investing.

Making sense of the small company effect, and solving all the problems I’ve just told you about, is the holy grail for penny share investors. Many have tried.

But, whisper it, a few months ago I think a team from Connecticut in the US finally cracked it. That’s the new research I was talking about in the email I sent two weeks ago.

On Thursday, keep an eye out for my next email: How to build a secret weapon – part two. In that email, I’ll explain in detail how they “grabbed a hold of” the small company effect.

Best wishes,

Sean Keyes

P.S. A couple of you have asked for more details about my subscription newsletter. It’s closed to new subscribers just now. But I expect we’ll be opening the doors again in the next two to three months. And keep the comments and suggestions coming to

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