The last few weeks have been particularly painful for those holding stock in would-be polyhalite miner Sirius Minerals (LSE: SXX). Having once been a holder of the stock myself, my sympathies go out to those who’ve been affected.
Sometimes, however, the most painful experiences in investing are also the most informative. With this in mind, I won’t go into detail about the reasons behind the Whitby-based firm’s share price slump here. Instead, let’s focus on what we can learn from the episode.
1. Be prepared to take a loss…early
Here at the Fool UK, we’re generally against selling unless it’s really necessary. As Warren Buffett’s business partner Charlie Munger once said, “the first rule of compounding is to never interrupt it unnecessarily“. Shares go up and down but, generally speaking, they usually go up over the long term. Investing works for the patient.
Notwithstanding this, there are occasions when taking a loss on a particular stock and moving on is logical. This is usually the case when the investment case has changed. For me, a big red flag was the ongoing issues Sirius had surrounding funding.
Since merely hoping for a recovery is not a sound strategy, those taking a loss earlier in the year and moving on with what capital remained ensured they’d live to fight another day. Remember that a 50% fall in the value of your holding requires the share price to double just to break even.
2. Check-in with the shorters
One of the first things I now do before buying a stock is to check how popular it is among short-sellers — those making bets that a company will run into (more) difficulties and its share price will fall.
In March, I commented that this kind of activity around Sirius had actually increased, despite investors lapping up a statement from the company that it was considering an alternative funding proposal from a major financial institution. As it turns out, shorters were right to be sceptical. Since then, the share price has crashed almost 80%.
At least some in the market think there’s further for Sirius to fall. According to the shorttracker.co.uk site, 6% of Sirius stock is still being shorted. For perspective, that’s the same as hated high street stalwart Marks and Spencer.
3. Don’t bet the house
To be clear, there’s absolutely nothing ‘wrong’ with buying shares in a miner. There’s a world of difference, however, in devoting a small part of your portfolio to this highly cyclical industry and throwing everything you own at it.
Sirius made the BBC News last weekend for two reasons. Naturally, the first related to doubts over whether the project will eventually get built. The second, however, related to paper losses incurred by retail investors backing the project, one of whom stated that he’d invested his entire retirement savings (£30,000) into the company when it was trading at a far higher price.
As sad as this tale is, it does highlight the importance of never falling in love with a stock and building a diversified portfolio of companies from a variety of sectors and operating all over the world. This becomes even more important if you want to back a company that isn’t yet generating profit since the behaviour of its share price will be dictated purely by investor expectations rather than hard numbers.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.