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Set to lose money on Sirius Minerals shares? This is what I’d do

Last week, FTSE 100 mining giant Anglo American made a formal offer for Sirius Minerals (LSE: SXX). Under the terms of the offer, Sirius shareholders will receive 5.5p per share.

While the deal still needs to be approved by SXX shareholders, I think there’s a good chance that it will go through (although there’s still a small chance other mining giants such as BHP could come in with a higher offer). Sirius directors, who have been advised by JP Morgan Cazenove and Lazard, believe that the deal is in the best interests of shareholders as a whole and consider the terms to be “fair and reasonable”. And without a deal, there’s a “high probability” that Sirius could be placed into administration or liquidation within weeks, according to SXX Chairman Russell Scrimshaw.

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Unfortunately, a 5.5p per share deal will mean that many private investors will lose a lot of money on this investment. This is due to the fact that a lot of people purchased SXX shares at much higher prices. If you’re one of these investors, here’s my advice.

Don’t stop investing 

My first piece of advice is: don’t let a Sirius loss stop you investing in the stock market. While investing losses are undoubtedly painful, stocks remain one of the best ways to generate wealth over the long run. Just look at the long-term track record of the FTSE 100 – it’s returned about 9% per year since its inception in 1984.

Losses are part of investing. Even the best investors in the world lose money on stocks at times. For example, Warren Buffett lost hundreds of millions of dollars on Tesco shares. The key is to diversify your portfolio so that one or two bad performers don’t ruin your overall performance.

Focus on profits 

My next tip is to focus on companies that are already profitable and generating cash flow (instead of investing in ‘pie in the sky’ companies that have no profits) and hold on to these companies while their profits rise. Having lost a fair chunk of money on unprofitable companies myself in the past, I now only invest in firms that are profitable and cash generative. And this has made a big difference to my investment returns.

Big gains

For example, about six years ago I bought shares in dotDigital, a highly-profitable little technology company, for around 24p. Those shares are now worth 114p (a gain of 375%), as the company’s profits are now far higher than they were when I bought the stock.

Another profitable company I’ve done well on is identity specialist GB Group. I first bought the shares at around 80p in 2012. Today, they’re worth 732p a pop as profits are much higher. More recently, last year I picked up some shares in Alpha FX, a very profitable currency specialist for around 650p. It’s now trading for over 1,300p due to the fact that profits have risen, meaning I’ve doubled my money in less than a year.

Of course, not every profitable company performs this well. However, in my experience, if you focus on cash generative, profitable companies that are growing at a strong rate, buy at a reasonable valuation, and hold for the long term, you’ve got a good chance of boosting your wealth.

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Edward Sheldon owns shares in dotDigital Group, GB Group, and Alpha FX. The Motley Fool UK has recommended Alpha FX, dotDigital Group, and Tesco. 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.