Whichever way I look at Sirius Minerals (LSE: SXX), I see the stock as speculative. It’s got all the right ingredients, such as a great story promising untold profits and shareholder returns – in the end.
There’s also some evidence the outcome could be deliverable. Look at all those offtake agreements the firm keeps signing with potential customer-companies, for example.
So it seems like a fair bet. Why not get in early? Okay, there’s the small matter SXX has yet to build its mine and infrastructure, or to lift a single gram of sellable potash from beneath the North Yorkshire Moors. But the odds of a successful long-term investment coming good seem strong for shareholders, right?
A risky strategy
I think a similar line of thought gets most investors motivated when they enter speculative situations. But it’s a risky strategy to buy profitless, jam-tomorrow shares in the hope the underlying businesses will achieve their potential.
Neil Woodford’s foray into the world of speculative shares is proving that point. One after another, Woodford’s speculative shares have been crashing – and not just a little – but great big plunges to the floor that almost entirely wipe out your capital, such as his investment in Midatech Pharma. Who? Exactly!
A lot could still go wrong with Sirius Minerals. I maintain my long-held view a better entry point may occur after the construction project is largely complete and when production looks within grasp.
Meanwhile, I punched out an article earlier in the month explaining why the funding risk appears to be reducing by degrees. However, the stock still carries a lot of risk for shareholders because of the uncertainties around the execution of the construction project, in my view.
It wouldn’t surprise me to see the share price at a fraction of the current level of 15p before the first customer receives the first bag of polyhalite product.
Remember compounding and not to lose money
I reckon it’s really important for investors not to permanently lose money. Indeed, Warren Buffett and others keep banging on about it. And the trouble with speculative ‘investments’ is they often take out your invested capital even if the underlying enterprise eventually succeeds. If you’re investing for retirement, it could be unwise to take punts on speculative shares at all.
Buffett figured out long ago, for example, that a pound he loses today is the same as losing the many pounds later he would have compounded that lost pound into. When I look at things like that, it makes me much more careful about protecting the downside potential in my portfolio. So out-and-out speculative positions, such as SXX today, are off my agenda.
Instead, I’d rather divert my investing funds into a collective, low-cost tracker fund that follows the fortunes of an index of shares and focus on compounding my money. On top of that, I’d go for a few individual shares I believe will outperform the market. But those beasts are rare, and I’d choose them very carefully.