The danger with all-or-nothing bets is that you do actually end up with nothing.
Having a big flutter on a high-risk stock is always tempting, but if you lose, and there is a fair chance you will, it can set your investment portfolio back several years.
It also breaches Warren Buffett’s first rule of investing: never lose money. Never mind his second rule, which is never forget rule number one.
On the other hand…
A Rule To Be Broken
A balanced and diversified portfolio should also include scope for a little adventure.
Adding a few potential multi-baggers to a stolid portfolio of FTSE 100 growth and income generators can turbo-charge your returns.
Plus the extra volatility also makes it rather more interesting to check your portfolio.
That’s why I’ve been keeping my eye on three do-or-die stocks in recent months: Monitise (LSE: MONI) (NASDAQOTH: MONIF.US), Rare Earth Minerals (LSE: REM) and Sirius Minerals (LSE: SXX).
The question is how to avoid crashing and burning right through Buffett’s rules one and two.
Known Unknowns
The obvious answer is to do your due diligence on the stock, but in this case, the obvious answer is wrong.
How can you sensibly measure the prospects for Sirius Minerals, when it is now at the mercy of a planning committee, which will decide on the fate of its flagship York Potash mine, which lies inconveniently below the beautiful North York Moors National Park?
We won’t know the verdict until later this year, but if you wait until the vote is in, the good news will already be in the price.
In other words, you are taking a punt. With the stock up 80% in the last month, there have been winners.
Lacking Visibility
It is a similar story with Rare Earth Minerals. This AIM-listed mineral developer has two lithium co-projects with apparently promising prospects, in Sonora, Mexico, and Yangibana, Australia.
Again, there are known unknowns with this stock, which is yet to actually mine any lithium, or produce any revenues, profits or dividends, and is burning through £1m a year.
The other known unknown is whether the pre-visibility study at Yangibana, due to report later this year, will show visible results.
Again, investors could win big or lose their shirts. The stock is up 35% over the last month, and more than 2000% over five years.
On The Moni
Monitise is another favoured high-risk play among Motley Fool investors, one that is down 30% in the last month alone, as management failed to find a buyer for the mobile banking software group.
I’m still tempted, especially given its rollcall of top clients, led by Santander, MasterCard, IBM, Visa Europe and RBS.
I’m also pleased by management’s bullish insistence that it can go it alone without a buyer, and is still on course to turn a profit in 2016, which could be a game changer.
Three is the Magic Number
Given the volatility and variables, the only way I can see of reducing the risk is to triple down and buy all three at once.
The profits from one winner could more than wipe out the losses from your losers. They can’t all fail, can they?