You answer your telephone only to hear your brother-in-law telling you that you have to drop everything and listen to this. He has a line on The Next New Thing. Gasoline from seawater!

Sure, it was spoken of in whispers during World War II, but now scientists have perfected the process and you can get in at the bottom. This is your chance. Oil prices are higher than ever, aren't they? In fact, the stock is selling for just $0.37 on the OTC:BB market. Should you buy 10,000 shares, just to be sure you don’t miss out? You can see your mind racing to figure out how you could raise that extra cash quickly.

You think about what happened with Microsoft, that company that was started in someone’s garage. Didn't that idea sound just as ridiculous back then? The same company whose stock options made multimillionaires out of secretaries. Now your palms are sweating and you wonder if tomorrow isn’t too late to buy some of this stock. What’s a Prudent Investor to do? On the one hand, the idea is patently ridiculous. On the other hand…. What if?

Missed Opportunities May be Costly

On the performance side, one of the risks to a prudently managed portfolio is that it will fail to capture the Equity Risk Premium of the world capital markets. (See: The Wealth Factor: What Every Portfolio Needs to Succeed.) In short, the purpose of prudent investing is to make sure that you are able to benefit from the earnings of as many good companies around the world as possible. It’s true that many of the strongest and most sustainable ones are here in the US, but there are some great candidates in other countries. You don’t want to ignore any good opportunities.

Imagine how poorly an investor would do if he was so “conservative” that he refused to have own shares in any company which was not established enough to pay dividends. His reasoning: If it isn’t safe enough and established enough to be making good money, I don’t want any of it.

With that kind of an attitude, he’ll miss a great deal of growth over any given decade. Indeed most of the universe of small cap and micro cap stocks do not pay dividends. Companies grow like oak trees if they are successful and they almost all start small. There is a risk in bringing any new idea to market and investors take that risk everyday. The price they pay to participate in that opportunity is relatively small since the shares have lower prices. That makes up for the fact that plenty of companies go bankrupt. Most go honestly and quietly, unlike Enron. But failure is still a fact of life in business and a risk that must be taken in a prudent portfolio.

So how do you handle the opportunity of a lifetime at less than the cost of a cup of coffee in the old days, when it didn’t cost $3?

First, you need to take a breath. This isn’t the first world shattering idea that has come about and it won’t be the last. Back in the 1600’s in England, shares in a company whose purpose was “To make a profit, the secret means by which are not to be disclosed,” were sold and even became expensive before the company simply folded in the crash of the South Sea Bubble.

Good Companies Prove Themselves

Let’s say, for the sake of argument, that you have been presented with an idea for a stock whose meteoric price rise will surpass Google or Taser. You’ll have to agree that somewhere between being sold for $0.37 and $1,200 per share it’s going to cross the $5.00 mark. For most institutional investors, that’s what puts it on the radar screen. Many mutual funds have investment policy statements that prohibit them from investing in companies with share values under $5.00. On the other hand, once that barrier is breached, you may see lots of accumulation in the stock if the idea looks good and if the company appears viable.

You might even be lucky enough to have an active manager who sees this opportunity early and grabs it for the fund that you own. But even if you miss that early stage, you’ll have ample opportunity to catch the value as the company’s revolutionary product becomes more and more mainstream and hence profitable.

So what about all that profit you missed form $0.37 to $5.00? That’s more than a ten bagger! How could you let that go?

It’s simple and here’s the reasoning: If this new idea is viable, the company will be in demand. Its shares will get listed on a major exchange. That’s a major goal for the investors and for the CEO of any company. Listing on a major exchange means millions for them. Of the thousands of stocks on the OTC:BB about 6 get listed each year. So while that stock for under fifty cents sounds great, in order to reduce your risk of rolling craps, you’d have to spread your investments around hundreds if not thousands of other “great ideas.”

Your best chance at capturing the equity risk premium across the world markets is not to speculate in low cost bargains. If you limit your choices initially through the use of a professionally designed investment policy statement, then you’ll significantly reduce your risk and conserve your capital.