Timothy SykesTrader Interview: Timothy Sykes. Photo: Timothy Sykes (Flickr)

Pod Chats: Timothy Sykes on Penny Stocks

Two Blokes Trading

Two Blokes Trading Episode 88: Penny stocks to Nuclear Eradication an interview with Tim Sykes

Tim Sykes is a penny stock trader and entrepreneur who won’t require an introduction to many of you, as he also runs a successful trading education programme for over 6,000 students at timothysykes.com

In this interview with Brandon and Tom from episode 88 of the Two Blokes Trading podcast, a typically-forthright Tim discusses his rise to fame and fortune through penny stocks, reveals his mentality and penny stock trading edge, and talks about the comparisons between crypto and the dot com boom.

Although the excerpts below reveal some great insight, we recommend listening to the podcast in full to get an idea of the energy and charisma exuded by Sykes during the interview - though it's not one for the faint-hearted!

No one trade is going to make you rich, but any one trade can make you poorTimothy Sykes

On penny stocks...

Money can't buy you happiness, but it can pretty much buy you everything else. I've been taking advantage of the small cap markets for nearly two decades now. They're just very inefficiently priced. With high priced stocks, with Forex, everything moves within seconds because there is so much money to be made.

With these low priced stocks, there's not that much money. The best penny stock traders I know, make a few million per year. And the best traders in the world can make a few million in an hour or a day. You have to kind of think like this is the gutter of the stock market…people who invest in penny stocks all think they are investing in the next Microsoft. They get pitched, "oh somebody just found a billion dollar oil field in Venezuela", or "somebody just found this amazing diamond mine in Kenya", meanwhile if you look at the SEC filings of these penny stocks, they say we only paid $25,000 for this oil field, we paid $10,000 dollars for this diamond mine, so the SEC filings tell a very different story to the press releases.

So there is a huge disconnect, and that's what I take advantage of, when the hype exceeds reality, I like to short-sell these pump and dumps. Or sometimes if the pump is strong and the hype is strong, I'll even try to ride it on the way up for a few days, all the while knowing they're full of shit.

So I'm trying to ride the waves both ways, I've made millions on the longs, millions on the shorts, it's not an exact science, but I try and take the beginning of the move and because penny stocks are so volatile, especially with these crypto and Bitcoin pieces, they're spiking 100-200% in a day, I take 20-30% and then I'm done.

On penny stock fundamentals...

The companies will put out a one page press release and hype themselves up, insiders will put out press releases, blog posts, social media and it's all designed to get the stock price up as much as possible. Then if you just do the SEC filing digging, most of these penny stocks have these 50, 70, 100-page SEC filings that no one reads, so you're just comparing the hype versus the reality.

Usually it's very simple, in their own SEC filings, they say "we barely have enough cash to survive", and then in the press release they say "we're going to be a billion dollar company". It's total night and day, it's very easy. The way I find the penny stocks in play is I look at the biggest percent gainers every day. Usually when something is hot for one day, it goes up 20, 50, 100%. The next day, if it's being hyped up, it probably goes up two, three sometimes four or five days in a row because the insiders have a whole stream of press releases that they've designed to put out consecutive days to get the stock price up as much as possible. Then the insiders can sell and then the stock price falls out of bed. It's pretty amazing.

On his mentality...

I picture every single penny stock as a failure, every single CEO as a liar, every single investor as an idiot. By thinking that way I'm not surprised by any of the tactics that any of those groups use.

It's actually pretty scary how failure-prone everyone is in penny stocks. Almost everybody is losing money and I've made millions just by telling the truth. My mentality, I joke around a lot but at the same time I'm just being honest.

On identifying his edge...

I started 1998/1999, I was in high school. I was a tennis player, but needed surgery on both arms and I had two casts, walking around high school like Robo Cop! I couldn't do anything, so I got into trading. My parents gave me roughly $12,000 in Bar Mitzvah gift money. And they thought that I would lose it all like the bastards that they are, they thought they would teach me a valuable lesson about money and instead I fucked up their plans and turned the 12k into over 100k in senior year of high school, and nearly a million dollars freshman year.

Back then I didn't know about short-selling, I didn't know how penny stocks worked, I was just riding inadvertently on the backs of boiler rooms where they would do phone calls at night back then. No one even knew about boiler rooms, they weren't exposed until 2001/2002. But I just saw a pattern where these shit penny stocks would spike up into the market close and then gap up the next day. So every single day I was buying four, five, six hot penny stocks that were closing strong, that had news, and then I didn't know why they would just gap up.

Later when the boiler rooms were exposed, we found out that, guess what, the best time to telemarketing someone is at dinner time, so the boiler rooms were working crazy hours at dinner, calling everybody and then the people who were suckered in over the phone would buy the next morning at the market open, thus creating the gap ups which I sold into. I just spotted a pattern, I made a million doing that, once we started realising it was boiler rooms, I took the same pattern and started shorting the stocks just a little later in the pattern, where I made my second million whilst I was in college.

On finding the patterns to profitability...

I'm looking for these simple patterns, I don't even know what's really causing them, but when they work time and again it's usually a process and usually some kind of manipulation going on that I'm taking advantage of. It doesn't work 100% of the time but works 70-80% of the time. I mean right now, anything Bitcoin or crypto related just spikes for two, three, four, five days in a row and it's a joke, but it's no different to '99 when companies used to just add .com to the end of their name and they would triple because you know they're going to 'take over the Internet'.

I remember this company Sportsman's Guide, they sold camping gear, they changed their name to SportsmansGuide.com. I bought the stock, it was already up 80% but I was like it fits the pattern, and within two or three days the stock had tripled, and I always sell too soon, I took my 50% profits. I look for these kind of inefficiencies, whether it's .com, crypto…whatever pattern it is in that's what I'm trying to take advantage of.

I tried big cap stocks, I tried all of these other sectors, there was no inefficiency, you were just kind of guessing which company was going to make it in earnings and how they're related to share price. It's a big giant guessing game, and that's why people make 10-20% on their money per year. With penny stocks, there's not much money to be made in the grand scheme of things of Wall Street, like a few million a year. But on average I make a thousand, two thousand here and there and it adds up.

On compounding gains and following process...

My average gain over literally 19 years trading is $2,000. So for me it's small gains, small gains, small gains, even smaller losses. Because I do lose. But I make $1,000 here, $1,000 there, sometimes I lose $200-300. And it does add up over time. So many people are so worried about making so much money right away; instead they should be focusing on learning and developing good habits.

I know a lot people who make money the wrong way, they get lucky on a trade, they use leverage…that's not a sustainable strategy that's going to get you wealthy in the long run, that's just going to feed your addiction right now. For me to actually make millions, and now I've got several students who have made millions, it's all about the process. In the beginning I encourage people to trade as small amounts as possible, even paper trade if you have to, just to get used to the volatility.

No one trade is going to make you rich, but any one trade can make you poor though, if you don't follow your rules or cut losses quickly. People don't really respect the rules, they don't know the rules, they want to focus on money…too many people want instant riches. I've never actually had a seven-figure trading profit in any one year, I've made six figures pretty much every single year, but it adds up to seven-figures over time.

On trading mistakes...

The biggest mistake is thinking you're right on any one trade, it doesn't matter how much research you do, it doesn't matter how good the indicators are, you really have to understand that any trade can become a loser. Knowing that and knowing that any single trade can blow you up if you are too hard-headed about it, if you bet too big on it, you have to really keep your ego in check otherwise the market will humble you, in many different ways.

I think the key is taking so many small losses that you get good at cutting losses. You have to get good at accepting that you're going to be wrong, and that's tough for a lot of people because their ego and the time that they spend makes them not wanting to be wrong. I just recognise that I can be wrong on anything, the market is not an exact science, it's more of an art. And I just need to stay in this game and pick out my spots.

With my strategy and penny stocks, there are more than enough inefficiencies, especially in this market. I am overwhelmed with how many plays there are, every single day. I just need to stay in the game, pick my spots. Sometimes I'll lose, sometimes I'll mistime it, but because I have this strategy that I do have an edge, in my niche, it's kind of inevitable that I'm going to make more money than I lose, and I just have to actually stick around to just be there. Too many people think it's going to happen all at once.

Tim is on Twitter @TimothySykes. For more information, head to timothysykes.com.

Want to listen to Tim’s full interview with Two Blokes Trading? Listen here to Episode 88:  Penny Stocks to Nuclear Eradication