Investing in OTC Stocks

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Topic Author
throw123112
Posts: 74
Joined: Sun Jan 02, 2022 10:39 am

Investing in OTC Stocks

Post by throw123112 »

I just did the math on my returns on OTC stocks over the last 5 years. I made 2.8x multiple of money overall vs. 1.8x if a similar amount had been invested in the S&P 500 with dividends reinvested. IRR was 40% vs. 16% for the S&P 500 with dividends reinvested. I made 4 investments. One was a loser where I lost 30% of my money. The other 3 were winners: on one I made 8.2x my initial investment and on the other two I made 3.4x and 2.0x my initial investment. All realized gains were long term in nature. Right now I have 20% of my portfolio devoted to these investments with the other 80% in the S&P 500 / Total Stock Market Index (this is excluding liquidity through cash in checking and I-bonds). Right now, I'm putting in around 2% of my portfolio into each new desirable OTC stock that I find (and it is typically 1 a year). If you were me, would you continue to invest in these OTC stocks? If so, how would you size a new position relative to the overall size of your portfolio (would it be a 1% position, 2%, 10%, etc.).
mhalley
Posts: 10432
Joined: Tue Nov 20, 2007 5:02 am

Re: Investing in OTC Stocks

Post by mhalley »

I’ve read many times that the worse thing that can happen to a stock picker is to get lucky with their first few picks. The regular stock market is bad enough but otc? SMH I would cut back on the gambling to less than 10% of your portfolio. Most would say zero, but I doubt you would follow that advice.

https://www.cnbc.com/2020/09/18/stock-p ... worse.html

https://www.wsj.com/articles/sorry-stoc ... 1494605068
Topic Author
throw123112
Posts: 74
Joined: Sun Jan 02, 2022 10:39 am

Re: Investing in OTC Stocks

Post by throw123112 »

Completely agree with your sentiment. The biggest reason it's 20% of my portfolio is because of the stock that went up 8.2x and was a much more modest position at cost.. It has a dividend yield of 10% right now and I would pay a substantial tax bill if I were to sell it. I'm loath to sell the stock at this moment. I think the biggest way I'm controlling risk is by limiting new positions to 2% of my portfolio. If they blow up and lose 50%, then it's a small hit. If they gain a significant amount of value I'm not sure I would sell them either. I guess the other risk is that this 20% position stock ends up being a big loser from here on out and I lose most of my money on it. That could definitely happen as well. I think my strategy will be to continue to make new investments (on average at 2% on new positions a year). If after 5 years I have done terribly vs. the market, I'll liquidate my holdings and shift them to a broad market index. On the other hand if I've continued to do well, I'll just keep going. Given that these are very small OTC stocks, I'll most likely continue to limit them to 2% of my portfolio at cost for a single given position. That's the way I'm trying to keep myself from blowing up.

I think you can have more of a potential edge in very small cap stocks (sub $50 million) compared to mid-to-large cap stocks where the investment landscape is signficantly more competitive. Since I'm buying individual stock positions, there is no management fee or expense ratio so that's a plus. I'm leaning towards the see what happens over next 5 years and limit positions to a very small chunk of my portfolio at cost.
tvubpwcisla
Posts: 1167
Joined: Sat Nov 09, 2019 9:09 am

Re: Investing in OTC Stocks

Post by tvubpwcisla »

Sounds like a lot of work. I'll stick with a low cost index fund like the S&P 500.
todaysBob
Posts: 167
Joined: Mon Mar 02, 2020 5:39 pm

Re: Investing in OTC Stocks

Post by todaysBob »

I had a private equity investment IPO this year, My $11k became $225k on exit. What did I do next?

Became overconfident and started trying to pick individual companies - something I had given up completely over last 2 years after learning about Bogleheads and had done tremendously well(made close to $1M in last 2 years including above $215k which ofcourse was a non-Bogleahd thing).

Outcome? Down $135k on $615k invested in last 2 months.To make it worse, all of this $615k is invested on Margin against a $1.6M portfolio in Interactive Brokers, which used to be $1.9M just 3 weeks ago. Luckily, this is still nowhere close to margin call as I have Portfolio Margin which needs only 15% equity. I am at 60% with 90% of the portfolio in ITOT/IXUS/VWO/IWM.

So when mhalley says "worse thing that can happen to a stock picker is to get lucky with their first few picks." he is absolutely right.

Just accept your luck and move back to total market funds. Even being successful with individual stocks will eventually bite you.

I have since come to my senses and closing these individual positions and accepting the losses. Too bad have to wait until Friday to liquidate my employer stock due to black out period.
gougou
Posts: 1317
Joined: Thu Sep 28, 2017 7:42 pm

Re: Investing in OTC Stocks

Post by gougou »

If I had an edge, I’d put 10% of my portfolio in a single stock and have a 10-stock diversified portfolio that beat the index out of the water.

So the question should be: What is your edge? Why do you think it worked why it would continue to work?
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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