Like a lot of people, I invest in a Stocks and Shares ISA not just for income but also in the hope of capital growth. Putting money today into the growth stories of tomorrow might help the value of my ISA grow over the years.
One of the potential growth stories of tomorrow is lithium. Lithium batteries are expected to become increasingly important in coming years. A lot of investor enthusiasm has been directed at electric vehicle manufacturers like Tesla and Nio. But in fact the role of lithium in our economy could cut much deeper than that.
So could stuffing my Stocks and Shares ISA with lithium shares today help me reap big rewards a few years down the line?
The role of diversification
No matter how optimistic I was, I would never concentrate all of my Stocks and Shares ISA in a single industry.
Unexpected challenges can always pop up in a business. So I make sure my ISA is diversified across multiple industries. I do think that there could be a role for some lithium shares in it.
Winning companies not a winning industry
What specific lithium shares might I buy? I think demand will surge in the coming decade and believe there are big profits to be made in the industry. But, crucially, they will be unevenly distributed.
Think of any new technology over the past century, from the internal combustion engine to digital commerce. Some companies, like Ford and Amazon, did very well out of them. But hundreds of competitors have long since failed.
In that sense, buying lithium shares strikes me as similar to being in a gold rush. Some shares could turn out to be goldmines, thanks to a business having a strong competitive advantage and attractive economics. But many will disappoint shareholders, like prospectors who dug for gold in the wrong part of the Klondike.
Lithium shares to buy now
So how could I decide what lithium shares I might buy for my Stocks and Shares ISA? I would start by trying to understand the value chain for lithium.
Some companies will own lithium mines, while others will operate those mines. Select firms will refine the lithium, others will make the batteries and yet more will sell them. Some firms may operate across multiple parts of the value chain.
Tesla, for example, ultimately hopes to vertically integrate its own lithium mining, battery production and sales. Other firms will be more narrowly focussed on a specific part of the value chain. Atlantic Lithium, for example, is focussed on mining.
Having identified the areas of the value chain where I think a firm could build a sustainable competitive advantage that gives it pricing power, I would then start to look at individual businesses. As with any shares, I would consider questions like how attractive the share valuation is.
I would also weigh up potential risks. Atlantic’s focus on mining in west Africa, for example, exposes it to concentrated political risks.
In other words, I would look for the same qualities in lithium shares as I do when considering any shares for my Stocks and Shares ISA. Whether an industry could be a goldmine or not, its newness should not make me throw my well-tested investment principles out of the window!
