A Little Ancient History:Penny Stocks

I guess the only way to have a true picture of the present is to understand the past. Man, that sounds self-indulgent. Still, before I get to where I am, I want to talk about where I've been.

In 1992, I was attending college in North Carolina and had every intention of becoming a film-maker. My major was 'Film Production' or something like that - I have no idea why my parents were footing the bill for such nonsense. Problem was, I showed up to my French class - a foreign language was required for any liberal arts degree - and my Professor was speaking only French. I don't know what these other kids learned in High School, but if I already knew French I wouldn't need the damn course. After a week I realized there was no way I could graduate if I had to pass a foreign language course.

I was dating a girl who was after a BS in Finance and she told me the business school didn't require a foreign language. The next day my major was switched to Finance, Insurance, and Real Estate. So, for all the wrong reasons, I stumbled upon the only vocation I've ever loved - investing.

My parents are successful but pretty conservative with their money and I don't think I ever heard much about the stock market. If I did, it never really sunk in. That year in college was the first time I really became aware of the market and the potential it offered (I was aware of the potential gains, not so much the potential losses). For me the whole idea of it was just miraculous - it seemed like money for nothing. And that's true and it's not.

Of course one's success in trading stocks, like any other endeavor, will over time stay pretty parallel with the time and effort committed to it. However, work isn't really work if you love it. That's how I feel about investing - but more on that in a future installment.

So I got into the business school like a duck in water and cruised through the economics and finance courses. Sometime around 1994 I told my parents I wanted to pay my own way through school and applied for some student loans to help me do that. I was working full time, making decent money waiting tables, and the student loan money ended up being more than I needed with my income. That's when I got the idea that if I put that money in the market, I could make a return on it, pay off my loans and have the rest left over for me. I'm pretty darn sure that's against the rules, but I figured there is no way to tell which money I used for investing - the loans or the money I earned. Regardless the right or wrong of it - that's what I did.

So in 1994 the overall market is going nuts and basically a monkey can double his or her money each year. I open an account at LaSalle St. Securities (man, did I feel like a big shot), have CNBC on the tv every waking moment, and start digging through the paper for my big gainer.

I came across a company called Great American Recreation in New Jersey - the symbol was GRAR. I noticed in the paper that it regularly traded with a low of 5/32 and a high of 7/32 (yes kids, we used to use fractions). This was just as simple as could be - I'd buy at 5/32 and sell at 7/32 and each time I did that I made a 6% return. The worst thing was it worked once or twice. I'd buy at 5/32 and put in my limit at 7/32 and then sit and watch the ticker on CNBC to see if my trade came through.

Then came the day when it traded at a high of 7/32 and my order didn't execute. I called the broker and furiously demanded to know what the hell they were doing up there. I can't even imagine the laugh they must've had as the broker is explaining to the rube on the phone (me) the concept of the bid and the ask spread. I was trading stocks and didn't even understand the basic premise of it.

I think I ended up getting out of that position at 3/32 with less money and a bruised ego. However, now I knew how things worked, and I was ready to head back in and make my fortune...

-Geoff