The Sirius Minerals (LSE:SXX) share price has been in free fall these past few weeks. The UK miner for the fertiliser polyhalite has been through a troubling time of late as a last-ditch attempt to raise funds was thwarted.
Yesterday the share price rose a whopping 37% in one day. This was exciting for people who had bought in cheap but added to the roller coaster of emotions for those long-term holders with everything at stake.
It is not clear to me why the price shot up yesterday, but it appears to be creeping back down today. One possible reason is that its nearby competitor, the ICL Boulby mine announced it is applying to extend its operations for another 25 years. Boulby is the only mine selling polyhalite, so applying to continue until the 2040’s gives positive sentiment to the product.
Buy cheap shares
Doubling down is when you buy more stock in a company you already own shares in when the share price is falling. The idea is that you reduce your average share price investment, so in theory, you feel you’ve lost less, even though you’ve put more money in.
It’s a strange and risky strategy. Some investors have made money this way, but many have lost a lot more. For example, say I bought £1,000 of Sirius minerals shares at the beginning of the year, when they were priced 27.42p. By the end of last week, they’d have dropped in paper value by 90%. If I then bought another £1,000-worth at the low price of 2.9p, I could technically have gained a rise of 37% on my second investment yesterday and my first paper-loss would have reduced to 85%. However, unless I sell out my second £1,000 I’d still be sitting on an overall paper loss.
Also, you have to be lucky with your timing to buy in at the lowest point and sell at the top. The reality of you achieving the full 37% increase is highly unlikely. It’s more akin to day-trading than investing.
Never double down
I first read the rule “Never average down” in the classic book Reminiscences of a Stock Operator by Edwin LeFevre, but I think it’s really just common sense.
However, common sense is not always clear cut when emotions are involved and, unfortunately for investors, emotions often run high. It can be difficult to separate personal feelings from investing decisions. When emotions impede strategic investing, it becomes perilously close to gambling.
In order to combat this, you need to recognise and understand your fear, overcome your inbuilt longing for wealth, set rules you can stick to, research your investments, and routinely review them with a clear, cool head.
Market volatility is fierce right now and many investors are facing the difficult decision of what to do next. This is never truer than with Sirius Minerals and the hardest part for many investors is admitting it was a mistake to have ever invested. There is no dividend yield to lessen the blow and earnings per share are now less than 1p. The chatter surrounding Sirius Minerals share price forecast is not very encouraging, and it seems long-term holders are losing their nerve.
So, should you double down and buy more Sirius Minerals shares? My thoughts turn to another piece of sage advice: “Don’t chase a losing trade”.
Kirsteen 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.