I read with dismay the unverifiable claims of one investor on a blog comment stream who says the "trick" to making money in biotech penny stocks is to somehow get in front of their momentum while they're burning cash and get out before the next private placement dilutes shareholders. I've got sad news for this idiot. No one can predict when a management team will launch its next private capital raise. Any current investor who knew in advance that one was coming and tried to get out could face SEC charges of trading on material nonpublic information, especially if said trade moves the price of a thinly traded stock. Lots of penny stocks are thinly traded.
Unexpected bad news can interrupt the short-term penny stock investor's thesis of trading for quick gains. A drug company that discovers bad side effects from a trial or a mining company that discovers poor grade ore can't keep that news a secret from the market. News events move the prices of penny stocks, and bad news moves against the penny gambler crowd.
There's no good analogy between penny stocks and poker. Every hand in poker is different and the ability to calculate conditional probabilities, apply game theory, and read an opponent's expression can help reduce risk. Those abilities are not as useful in penny stock investing as the ability to read balance sheets, estimate market size, or compare the price points of comparable products. I've done that on this blog for some biotech stocks.
I once knew a fellow military veteran who bragged about her recent investment in a penny stock. Her logic was hilarious. "It's only a few cents a share, so it's a bargain!" I did not laugh in her face but she was too dense to read my expression of dismay. Her due diligence consisted of looking at the share price. That is totally stupid but lots of penny stock investors think that way.
I haven't found much peer-reviewed academic research on penny stock investing. A few web queries didn't turn up much besides the usual pumping sites and message boards. There may be some room for original thinking in this area that I could publish myself, if only to debunk some of the folk wisdom that dummies use when they "invest." I like this FMA paper, "Too Good to Ignore? A Primer on Listed Penny Stocks" because they located good source data to determine whether a penny stock portfolio generates alpha.
I don't listen to penny stock investors, or the paid touters who pump them into stupid investments. I look at underpriced stocks from a private equity perspective to understand whether a ten cent gamble will ever become a ten dollar share. That transformation happens when talented executives meet their development milestones, launch viable projects, and grow market share. It happens in hard asset sectors when academically qualified geologists and engineers successfully pull ore and energy out of the ground at costs below the historical average price of their target commodity. I have not yet invested in a penny stock. I'm not saying I will never buy one, but I have to believe in its business model.