Trading Philosophy

My philosophy is to combine value investing analysis with elements of timing and technical analysis in order to outperform the overall market. Having studied and traded stocks listed on the OTC Bulletin Board for some time, I believe that the OTC market provides significant opportunities to beat the market because the relative lack of information about companies on the Bulletin Board leads to large pricing inefficiencies that can be exploited by investors.

I would describe my style of investing as conservative, because I generally choose to invest only in companies that are profitable, growing, and with reasonable earnings visibility. Having met those categories, I then apply valuation analysis in order to determine a fair value for the company, and from this analysis I derive a list of undervalued companies that would potentially make good investments. While I might make small investments in these companies, I generally choose to wait for signs that the market has begun to recognize that these stocks are undervalued before establishing a full position in a company. This is where experience, technical analysis, and timing can add to the baseline valuation analysis, resulting in outsized gains over the short to medium term. It also helps prevent me from having my money tied up in “dead wood” stocks that trend sideways for months on end, waiting for their value to be recognized.

For sure, this style of trading is not right for everyone. Using this method requires, at the very least, that an investor has the time to watch the market on a daily basis. It also requires a lot of research, because there are no analyst summary reports to read, and most investment research sites do not cover stocks on the Bulletin Board. I spend quite a bit of time each week reading SEC filings, and you should too if you want to invest on the Bulletin Board. They are boring, but they’re the best source of information (and often the only source) for stocks traded on the Bulletin Board.

Investing in the Bulletin Board also requires a bit of creativity. The lack of information about OTC listed companies means that you have to try to create earnings forecasts yourself by getting information about the general market in which a company operates. It’s amazing what you can find on Google News if you’re creative, and this type of creativity can give you the edge to make big money. If you can’t find an edge, don’t be afraid to put the stock away and admit that you just don’t have enough information. Being conservative and avoiding big losses is an asset on the Bulletin Board, and in my experience, you can do very well without having to take on the extra risk.

Finally, the Bulletin Board requires a stomach for volatility, as the OTC market is subject to wild price swings. I would caution investors not to confuse volatility with risk. In fact, volatility can be a friend as well as an enemy, and it is what allows us to make big money over the short term. As long as you’re sensible with portfolio allocation, volatility is not something to fear. My baseline rule: if your portfolio keeps you up at night, your portfolio allocation is not sensible.

In the course of writing this blog, I will undoubtedly make mistakes, errors of judgment, etc. As investors, none of us get it right 100% of the time. Having my thoughts down on paper will allow me to analyze my mistakes and improve my analysis, with the ultimate goal of continually making myself a better investor. It is my aim that the readers of my blog will also become better investors by joining in my thought process.

Thomas Kelly

January 27, 2007