The promise of penny shares

When it comes to the thrill of investing in cutting-edge companies, you can’t do better than penny shares. Tom Bulford looks back at some of his past triumphs.

As announced, I will be handing over my Penny Sleuth and Red Hot Penny Shares baton to David Thornton. David has his own ideas and stories he’s bursting to tell. Before I go though, I want to look back at a few of the closed trades I remember most fondly.

Like the day I met Todd Kozel. I can remember it vividly. Optimistic and fearless, this American oil man reckoned that there must be oil in Kurdistan and was not going to let a little thing like the lingering hostilities of the Iraq war deter him. He showed me some photographs of Kurdistan, with the oil literally seeping out of the rock like treacle. He showed me satellite photos of Kurdistan’s dome-like geological structures, identical to those that hid massive oil reserves in the Middle East. “There is no place like it on earth”, he oozed. His enthusiasm was compelling.

At the start of 2008 I tipped shares in Gulf Keystone Petroleum at 32p. Within a year they had dipped below 10p but the story was as good as ever. Then, one glorious day, in August 2009 Gulf Keystone struck oil. Within three weeks shares had jumped from 13p to 90p. In February 2012 they hit a high of 397p. I had a letter from a subscriber who told me that he had made so much money he had bought a farm.

If you are following the Gulf Keystone story today you will know that it has become hopelessly bogged down by the sort of corporate governance row that po-faced City fund managers love and go-getting businessmen detest. What will happen from here is anybody’s guess, but I can hardly see the share price rising six-fold in a month as it did back in 2009.

Two of our hottest Red Hot tips

The early bird catches the worm, and if there is one reason for investing in penny shares, that is it. I have had a brilliant time over the last decade, meeting the founders of companies that sometimes have little more than a business plan scribbled on the back of an envelope. These successful business men and women have a few crucial things in common. They have a vision, they like making money and they are enthusiastic.

Take Claude Littner, who now plays the role of Mr Nasty on The Apprentice. In 2005, he showed me around a five-a-side football centre in Watford. He was mad on the prospects. “The financial returns from this business,” he enthused, “are brilliant, absolutely brilliant.” And he was right. Powerleague built a chain of five-a-side centres and delivered a 66% profit for Red Hot Penny Shares.

And then there was Russell O’Connell. I dropped by to see this smooth-talking Aussie at the headquarters of MyHome International in Kingston, Surrey. He wanted MyHome to relieve thousands from household chores like cleaning and dog-walking and he had written a large manual for the benefit of franchisees, right down to the best way to clean a tap.

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On the office walls were posters reminiscent of Communist China. “There is no trying! There is only doing or not doing!” and “View all customers as beautiful gardens that must be cultivated and watered frequently!’ Russell himself knew all the chat. “This is a template business in a box,” he told me, “a money-making machine that cannot fail.”

Well, unfortunately it did fail! Russell tried to expand too fast and came crashing down to earth. But not before Red Hot Penny Shares had pocketed an 89% profit. And this story illustrates an essential point about investing in penny shares. What really drives penny shares is excitement about the idea.

The biggest story of the last decade

But unlike bigger companies that offer the security of revenue, profits and dividends, penny shares offer a dream of riches. Share prices are driven by the crowds, the collective and self-fuelling enthusiasm of investors who are entranced by a story. The secret is to see a good story early, and this applies as much to a sector as an individual share. The biggest story of the last decade has been the rise of China and the boom in natural resources. Now of course these companies are facing rising costs and political hostility, and things are not easy. But in three glorious years from 2005 the mining index quadrupled. We grabbed a 112% gain in Kenmare Resources, a 111% gain in Range Resources and a 200% gain in Gemfields.

Happy memories! Memories of triumphs and disasters, of heroes and rogues, of thrills and spills! Above all though, a sense of satisfaction from having done the work, of having got my head around such obscurities as cloud computing, the Fischer-Tropsch process, LED lighting, and top level domains. Penny share companies are the cutting edge. They are the pioneers. They are the risk-takers and the eternal optimists. They soar to the sky or crash to the ground. This much will endure.

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