Dumb Luck Investor: Betting On Those $1 Stocks

Maybe there are honest stockbrokers out there after all.

A close friend of mine told me the following story: His father had called him a few weeks back, interested in buying stock in UAL (UALAQ Quote). At roughly $1.50 a share, he thought it was a steal, simply refusing to believe that United Airlines would ever go out of business. (Were investors saying the same thing about Enron (ENRNQ Quote) or Arthur Andersen?)

The father had called his broker to buy 10,000 shares, but his broker said no. Too risky -- he wouldn't do it. As an alternative, he called his son, who placed the order for him in his own online account.

In fact, so enamored is my buddy with $1 stocks that he followed his father's logic and bought another 10,000 shares for himself. Unfortunately, things could get worse for United -- and did. Shares sank below 60 cents before perking back up toward $1. Needless to say, the 20,000 shares are now very much under water and, despite drastic changes within UAL and the airline industry, a major league rebound doesn't look likely anytime soon.

Such are the trials and tribulations of playing at the subterranean level of the market, where investors try and outsmart each other and the rest of Wall Street by betting on major comebacks of major losers. The logic is easy to understand: If a stock is trading at $1 or less, it shouldn't take much effort for it to get back to $2, doubling one's investment in no time at all. It worked for DaimlerChrysler(DCX Quote); it was a disaster for Enron. Who knows what might happen with United, WorldCom (WCOEQ Quote) and the like.

Such betting on dirt-cheap stocks offers interesting lessons for those willing to "gamble" rather than "invest." The major difference, say those who play this game, is in picking companies that are beaten down but are not down for the count.