To OTC Journal Members:

This edition of the OTC Journal is sent primarily for the benefit of our AOL Members. Our newsletter is on the AOL "White List", meaning that AOL will not block its delivery. Recently, we changed the IP address of our mail server, and because of this move AOL inadvertently blocked the delivery of our last several newsletters. The problem has now been resolved.

If you wish to review our newsletters in chronological order, simply go to the following web address: http://listserv.otcjournal.com/

Here are two very important excerpts from our last two newsletters. If you are not an AOL subscriber and have already read this material please delete this edition. We apologize for any inconveniece.
 
 

July MVP Award

Our July MVP Award was featured last Wednesday, but many of you did not receive the edition. It is a free, no strings attached 10 week subscription to the Wall Street Journal. If you are a new member and not familiar with this feature, we use the marketing leverage of our 300,000 strong membership group to obtain special offers each month on behalf of our members. Monthly you are awarded 150 Membership Value Points which you can redeem for our monthly special.

Apologies to our valued members outside the Continental United States. If you live in Alaska, Hawaii, or anywhere else outside the United States you do not qualify for this MVP Award. This is out of our control.

We have been in nasty bear market since April. Although stocks have stopped free falling, there has been very little life to the upside. When this market turns back up we will be there with money making ideas in micro cap stocks, and many of our currently covered companies will rebound dramatically. Until then, here is a no cost benefit for you:

To thank you for your continued membership in the OTC Journal you have just been awarded 150 new Membership Value Points, which you can redeem right now for a 10-week subscription to The Wall Street Journal. There are no strings attached, no bills; you earned your points and your reward.

Rules For Successful MicroCap Investing

For some time we have been planning on publishing a section on the basic rules for successful microcap investing. The current wretched state of the market offers the perfect opportunity to review some of the basic rules which will work over the long term.

We will be placing this edition up on the Home Page as a reference section. You can refer to it from time to time if you need a refresher course during psychologically challenging market conditions.
 

MicroCap Investing- An Overview

In today's market environment most investors define a microcap company to be any stock with a market cap below $200 million. Market capitalization is determined by multiplying the price of the stock by the number of issued shares- this gives you the value which the market is placing on the company.

Microcap stocks do not lend themselves to traditional analysis. There is usually no history of revenues and earnings from which one can predict future performance. There are few or no analysts publishing formal financial and price projections. There is generally very little information from which one can make a "logical" decision to invest in a micro cap stock. Investing in MicroCap stocks tends to be more emotionally driven.

Dr. Richard Geist, Harvard PhD in psychology, long time observer of the psychology of investing, and contributing editor to the OTC Journal, says there are four primary factors that contribute to success in the micro-cap market:

• Financial understanding--knowing how to evaluate a company's performance and its management.
• Experience--a good intuitive feel for products and services that will impact society.
• Luck--unpredictable good fortune blessing a few of your holdings.
• Psychology--understanding enough about yourself to avoid emotional mistakes.

Before deciding to invest in a microcap stock be certain that you like the company. If you have no feel for the company's business model please do not invest. Never invest on the basis of a hot tip or the advice of this newsletter. We will continue to come up with about eight ideas each year, but you must make the ultimate decision. It is your money, and you will suffer the consequences of any loss and enjoy the benefits of any gains. We already know that we are going to be wrong about some of the companies we profile. Therefore, you should expect the same.

After reading the section below if you feel that you cannot adhere to these basic principles please do not invest in microcap stocks. It is not the area for you. We recognize that this is only one small corner of the entire investment world. However, it is one that we believe every investor with a small amount of discretionary capital should be involved in.
 

Basic Investing Rules For MicroCap Stocks

Here are several rules to which you must adhere to be a successful microcap investor:

• Never invest more than you can afford to lose. Since microcap stocks are highly risky, only a small percentage of your assets should be committed to microcap stocks. Consult a professional licensed financial advisor if you are unsure about a suitable amount to invest in this high risk end of the market.
• Be prepared to invest with at least a one to two year time horizon. Peter Lynch, one of the most successful fund managers of all time,  said that he made his best returns starting the second year he held a stock, often waiting five years to fully maximize his profits. While one month might seem like an eternity to a short sighted investor, one year is a small fragment in the life cycle of a successful company. A specific example is Comverse Technologies (NASDAQ: CMVT). One of our editors traded this stock in 1987 at $.375. Today (July 28, 2000), the stock is trading at $78 ($234 split adjusted) after a 2:1 and 3:2 split. It would be interesting to learn if there are any shareholders who purchased this stock at $.375 in 1987 still holding it today.  A 10,000 share purchase for an investment of $3,750 in 1987 would be worth $2,340,000 today.
• Learn to accept losses. There is a much higher failure rate among micro-cap companies. Successful micro cap investors have to develop the capacity to tolerate a loss. You must be secure in the knowledge that a few really large winners will result in success. Most unsuccessful investors become pre-occupied with their mistakes, blaming brokers, analysts, company management, or the OTC Journal. Successful investors expect mistakes. Most successful investors enjoy the process of investing as much as they enjoy making money. Stocks can go up infinitely, but they can only go down to zero. Therefore, whenever you invest for the long term in a microcap stock your upside potential is much greater that your downside risk.
• Learn to Tolerate Bear Markets. Microcap Stocks, as with all stocks, will always trade both higher and lower than you ever thought possible. We go through extended periods of time when market conditions are unfavorable for microcap stocks which can be psychologically damaging to undisciplined investors. Because microcaps generally trade less volume than their bigger brethren, market makers can manipulate price levels in their favor in both up and down markets. The absence of buyers in microcap stocks during a bear market allows market makers to drop prices dramatically on very little volume. High percentage pull backs on light volume in a microcap stock can be excellent buying opportunities. However, in order to take advantage of such opportunities you must have capital, the courage of your convictions, and the patience to wait for an upturn in market conditions. You must discipline yourself against allowing the psychological impact of tough market conditions to affect your belief in the future of the companies you own.

Trading Strategies For MicroCap Stocks

Here are some tried and true trading strategies that have proven successful over time in microcap stocks:

• Never invest the entire amount you are willing to commit on the first trade. We have never profiled a company that did not trade below our profiled price at some point in time. Unfavorable market conditions can be excellent opportunities to add to positions. Also, small companies stumble in the execution of their business plans leading to depressed prices in their stocks. If they right the ship at a future point in time this can represent a buying opportunity. If the stock is trading in your favor you can always add to a position at higher levels if the company is performing beyond your expectations.
• Always use limit orders. Market Makers in microcap stocks are in business to make money on your trade, and they are ruthless. Microcaps trade less volume than larger stocks and are therefore more easily subject to manipulation by market makers. We have often watched market makers fill a market order to the detriment of the investor. Even if you are willing to pay the current market price, please place it as a limit order. The next generation of direct execution brokerage firms will help eliminate the predatory practices of market makers. However, stocks on the OTC Bulletin Board do not trade within the electronic systems which allow investors to bypass the market makers. We hope the regulators will make a change soon.
• Never Place an Order to Buy a Stock at the Market Price when it Gaps Open. A Gap occurs when a stock opens at a much higher price than it closed at the previous day based on some news or event. When market makers have market orders for a stock at the open, they will often take the stock up and fill the market orders at an exaggerated higher price.  When shareholders sell into the newly established higher price the stock will drop back down and fill the price gap that was created.  Market Makers have been using gaps to line their pockets with money from investors for years. Generally, if you want to purchase the stock that day, place a limit order at the previous day's closing price. You will nearly always get your order filled.
• Never Sell a MicroCap Stock At the Market When it Gaps Down at the Open.  Traders use the same tricks on bad news. If they have an excess of market sell orders at the open, they will fill those orders at a ridiculously low price. Always wait for the inevitable bounce before liquidating your position if the news if bad enough and you are looking to preserve your remaining capital.
• Don't Be Afraid to Add To Positions During Unfavorable Markets. If you have followed the rules and not committed the entire amount you are willing to invest, bear markets can be excellent buying opportunities. Microcap stocks will generally drift down in the absence of buyers, and can drop to ridiculously low levels during bad markets. Profits can be made when you purchase during those periods of time when no one wants the stock. As a general rule, a microcap stock will make 90% of its move up in 10% of the time that it trades. Before adding to a position make your best effort to determine that the company is still on track to execute its business plan. Try not to put good money after bad if you can get the information required to make an informed decision. Don't be afraid to pick up the phone and contact the company directly.
• Take Some Profits When the Stock Is Hot. Since microcaps tend to make 90% of their moves in 10% of the time there is nothing wrong with taking a profit when your stock is climbing the charts. One tried and true strategy is to sell 50% of your position after the stock doubles in value. This allows you to recoup your initial investment and hold the remainder for the long term with no risk. However, don't sell your entire position. You never know how high a stock will go.

Conclusion

There is a whole world of investment opportunities in securities and microcap stocks are just a small part of it. However, they represent the basic tenant of the American Dream. Hard working entrepreneurial management can use revolutionary ideas and technologies to make extraordinary returns for the average investor.

We have seen it happen hundreds of times- $2 stocks that go to $50, and $2 stocks that go to $0. Our challenge is to uncover the hidden gems amongst the 5,000 microcap stocks that trade. This is the role of the OTC Journal- to uncover those hidden gems with the potential to go from $2 to $50.

We are only a provider of ideas- You must ultimately decide if an idea we present is right for you. We will have winners and losers. We have already had several huge winners. We can only hope that you like something that we profile and are along for the ride on at least one of our huge winners.
 

Click Here to view our compensation on every company we have ever covered, or visit the following web address:  http://www.otcjournal.com/disclaimer.html

All statements and expressions are the sole  opinions of the editors and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities  mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein.

The editor, members of the editor's family, and/or entities with  which they are affiliated, are forbidden by company policy to own, buy, sell or otherwise trade stock for their own benefit in the companies who appear in the publication.

The profiles, critiques, and other editorial content of the OTCjournal.com may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein.

THE READER SHOULD VERIFY ALL CLAIMS AND DO THEIR OWN DUE DILIGENCE BEFORE INVESTING IN ANY SECURITIES MENTIONED. INVESTING IN  SECURITIES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK. THE INFORMATION FOUND IN THIS PROFILE IS PROTECTED BY THE COPYRIGHT LAWS OF THE UNITED STATES AND MAY NOT BE COPIED, OR REPRODUCED IN ANY WAY WITHOUT THE EXPRESSED, WRITTEN  CONSENT OF THE EDITORS OF OTCjournal.com.

We encourage our readers to invest carefully and read the investor information available at the web sites of  the Securities and Exchange Commission ("SEC") at http://www.sec.govand/or the National Association of Securities Dealers ("NASD") at http://www.nasd.com. We also strongly recommend that you read the SEC advisory to investors concerning Internet Stock Fraud, which can be found at  http://www.sec.gov/consumer/cyberfr.htm. Readers can review all public filings by companies at the SEC's EDGAR page. The NASD has published information on how to invest carefully at its web site.

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