Next Investors logo grey

Investing 101: Taking Stock of your Stocks and Diversification

Published 18-DEC-2021 10:40 A.M.


15 minute read

The ASX 200 finished flat as the low volume Christmas stagnation continues.

But we aren’t too interested in what the top-end of the ASX is doing - we want to see what our (much smaller) portfolio companies are capable of in the coming months.

Our investments are the high risk/high reward companies that can move independent of the broader index.

Today we will share two important lessons we have learned (the hard way) for micro-cap/small-cap investing.

We also want to explain why our portfolio is so heavily geared towards commodities.

We think we’re well positioned to benefit from a commodities supercycle in an inflationary environment.

Remember, commodities generally do well in an inflationary period - and our portfolio is largely positioned for this outcome.

Part of this comes down to the fact that commodities remain a strong hedge against inflation.

We think Australia is in the midst of a major mining boom across a broad swathe of commodities - even the iron ore price has recently turned back upwards.

Globally - we see commodities in a range of jurisdictions getting more and more attention.

Things like copper, nickel, uranium, cobalt, manganese, graphite, helium, oil, gas and of course lithium.

So we really like how 2022 is shaping up for our portfolio, despite the recent cooling off period we’re seeing play out right now.

Lessons learned: Taking stock of your stocks during the holidays

Milk and cookies aside, the holidays are a good time for reflection.

As investors, we like to use this period to refresh mentally and reflect on our portfolio positions: why we invested and what has changed about our investment thesis.

This has been something we have been doing for years, and we wanted to share two key mistakes beginner investors often make in small cap investing - we certainly made these mistakes when we first started out.

#1: Are you “in love” with an investment?

Falling in love with a stock leads to irrational decision making and almost always ends badly.

If you find yourself interpreting every bit of news as positive and not critiquing anything management does it may be a sign you might be “in love”.

In small cap investing you need to be ruthless and free of emotion.

With markets being quiet, it is the perfect time to revisit the stocks that have performed poorly in your portfolio, take a step back and really think about whether it is time to move on OR if you are satisfied that the poor performance was justifiable (things often go wrong in small cap investing) and you still back the management team and the project, and are happy to settle in for another year of holding.

Also remember that small cap share prices don’t usually instantly reflect progress made in the business, so we always focus on whether the company achieved business milestones and objectives... not on share price rises or falls, which in small cap stocks are influenced by a number of other factors too.

#2: Diversification

With small-cap investing, having some level of diversification is important.

Small cap stocks are inherently high-risk, high-reward, which means that they have the potential to go up significant multiples, but if things go wrong, and they do, an investment could go to zero.

When investing in opportunities with this type of risk/reward pay-off we have found it is best not to focus 100% of your investment portfolio in one stock, some people even lever-up to go above 100% of their total wealth in one specific investment.

Lets play-out a scenario:

  • You have 100% of your small cap portfolio in that one stock, it is drilling for gold and returns no mineralisation, the share price drops 60% from where you purchased it. You have lost 60% of your portfolio.

Now lets diversify:

  • You have 10 different investments and that gold-explorer makes up 10% of your portfolio, the share price is down 60% from your entry price, you have only lost 6% of your overall portfolio.

With micro-cap/small-cap investing we adopt a “venture capital” style approach where we expect one or two outsized performers to cover losses made across the rest of the high risk investments.

A portfolio should be set up so that it can afford to have big drops in some investments, with these losses offset by one or two big winners that go 10x, 20x or even 100x.

Let’s play this out:

  • Assume you have 10 investments that make up 10% of your portfolio each for a total portfolio size of $10,000.
  • The first nine stocks: 4 are down 25%, 3 are down 60% and the remaining 2 are neutral. The effect on your portfolio is - $2,800.
  • The last stock is up 10x higher than the initial investment, the effect on your portfolio is + $9,000.
  • The net impact is a gain of $6,200 despite the majority of the investments going down.

The lesson we learned investing in high risk small caps is to have enough horses in the race so that if one of them takes off, the portfolio makes money overall.

With investing no one is perfect, and we made these mistakes early in our investment journey.

The first step to success as an investor is to understand that it is a constant journey of learning and understanding that you never know everything.

You can find more educational investing information in our ‘How to make money investing in small cap stocks’ ebook - a worthwhile read for the holidays.

In keeping with our end of year portfolio strategy of evaluating our portfolio stocks through an objective lens, we are continuing to write our investment memos to document what we expect from our investments in 2022. Here is the one that we completed this week:

Have a Merry Christmas and Happy New Years.

Next Investors.

📰 This week on Next Investors

On Wednesday our small cap telco investment Vonex (ASX:VN8) announced its fourth acquisition in the last 19-months, continuing to follow the tried and tested telco playbook of rapid growth through acquisition.

The latest of these acquisitions is South Australian telco Voiteck which resembles a mini-VN8 focused primarily within the South Australian market.

VN8 already had a significant footprint in NSW, Victoria, Queensland and WA, but little exposure to the South-Australian market. Rather than expand into SA as a fairly new market entrant, the Voiteck acquisition accelerates customer acquisition and provides multiple cross selling opportunities across a much broader channel partner network for VN8.

📰 Read the full take here: New Acquisition for VN8 as “Hunt for Growth” Strategy Continues.

Earlier in the week we put out a note on our uranium exploration investment GTI Resources (ASX:GTR) which is currently in the middle of a ~15,000m drilling program in Wyoming, USA.

GTR is targeting uranium mineralisation that is amenable to In-Situ-Recovery (ISR) mining methods - considered the cheapest method of uranium mining. Going into the drilling program, GTR set the overall target at a Grade Thickness measure of 0.2 with grades no less than 0.02% uranium.

Late in the week GTR came-out with another batch of results taking the total to 24/100 holes reported on. The results to date have averaged a GT measure of 0.68 with peak results of 1.92.

In our note we touched on why Grade-Thickness (GT) is the measure to be focussing on with all of GTR’s drill results.

📰 Read more: First batch of USA uranium drilling results beat expectations - more results due in coming weeks.

🗣️ Quick takes on key portfolio company events this week:

Pursuit Minerals (ASX:PUR)

On Thursday PUR announced that it had secured an option to acquire a new gold project ~38km north of the Kalgoorlie region.

The 12-month option gives PUR the right to acquire ~30 km^2 which is a long-strike multiple discoveries and just north of the Paddington gold mill. The tenements were last explored in 2008 and had hits of up to 10m @4.15g/t Gold from 41m.

We think the deal is well-priced and provides PUR with additional gold-prospects during a period where the market isn't as interested in gold exploration companies.

Basically a counter-cyclical acquisition at a good price.

Next: We want to see follow up auger geochemistry at the Phil’s Hill prospect to help form the basis for the next batch of drill-targets at the Warrior project.

Invictus Energy (ASX:IVZ)

On Wednesday we sat in on IVZ’s investor briefing. With the recent announcements regarding the farm-in option and rig contracting option signed, we think it was a great time for IVZ to sit down and brief its shareholders.

Key takeaways:

  • Final results and interpretation of the 2D seismic acquisition program is expected soon.
  • IVZ is still looking at a range of funding options for the drilling program and expects to be in a better negotiating position once the 2D seismic interpretation is completed.
  • Second half of the production sharing agreement close to being finalised.
  • IVZ, capped at $60M, is just a fraction of the size of its TSX-listed neighbour Recon Africa, who are capped at $1.1BN.

You can view the full recorded briefing here.

Next: We want to see detailed results and final interpretations from the 2D Seismic data acquired, and any updates around the remaining funding for the drilling program.

Dimirix (ASX:DXB)

This week in the biotech sector there was big movement at the large-cap end of the market with Australia’s largest biotech company CSL acquiring Vifor Pharma for $16.4BN.

Vifor Pharma is a global pharmaceutical company that specialises in naturopathy (kidney disease). It has a number of commercialised products, and pipeline drugs for CSL to develop.

One of the key reasons for the acquisition is that CLS was interested in targeting the “growing [kidney] disease market with over US$25 billion opportunity”.

This acquisition highlights the value of the growing renal market (for kidney diseases), and shows that DXB is in the right place at the right time to be developing its treatment for a rare kidney disease - FSGS.

Interestingly, DXB’s CEO Nina Webster has made deals with Vifor Pharma in her previous role as commercial director of Acrux.

This bodes well for DXB and highlights the potential upside of a successful pharmaceutical business with a focus on kidney disease treatments.

On Thursday DXB also announced a patient recruitment update on its second Covid-19 study on ICU patients with pneumonia.

With 662 patients now recruited into the study we expect recruitment to be complete next quarter and results announced shortly after.

Next: Each of DXB’s phase-III clinical trials have begun (two for COVID-19 and one for FSGS). We want to see patient recruitment updates on each of these trials and hopefully some positive results from the COVID-19 studies early next year.

Thompson Resources (ASX:TMZ)

In the middle of the week, TMZ announced that it had completed the 100% acquisition of the Silver Spur Mine. This was confirmation that the definitive agreement from August had now been finalised.

The Silver Spur acquisition brings TMZ one step closer to executing on its Hub and Spoke Strategy by extending its landholding in and around the flagship silver deposit.

Later in the week, TMZ announced that it had launched a geophysics program across its Texas district silver project and some geochemical mapping/sampling at the Conrad project. A great way to end the year and get started on target generation works across its portfolio leading into drilling programs in 2022.

Next: We want to see TMZ deliver JORC Mineral Resource Estimates for each of its Texas silver district projects by the end of Q1-2022 and across its entire portfolio by the end of Q2-2022.

Los Cerros (ASX:LCL)

LCL announced on Monday several more wide, high grade (for porphyry) drill results from its flagship Tesorito prospect in Colombia.

LCL is trying to calculate a maiden JORC resource - which was originally planned to be announced before Christmas, but has been deferred to 1H22 as the deposit remains open in several directions still.

LCL keeps finding more gold and doesn't want to calculate its maiden JORC resource until the edges of the system are found.

The announcement also detailed that a fifth rig, that can drill down to 1km depth, is currently drilling into what we affectionately refer to as the giant magnetic blob. This is a monster IP anomaly that LCL postulated existed before an aeromagnetic drone and ground-based IP surveys subsequently confirmed.

What is being tested is whether Tesorito and other nearby discoveries are just the bookends to a larger gold system.

Next: We want to see assay results from the first few holes of this large IP anomaly, and for LCL to find the edge of the Tesorito porphyry system so that it can calculate a maiden JORC resource.

Galileo Mining (ASX:GAL)

On Thursday GAL put out an exploration update across its Fraser Range and Norseman projects.

Drilling at the Fraser Range is largely focussed on the copper/gold Delta-Blues prospect and was a follow-up drilling to some down-hole EM surveys were run. GAL confirmed that more sulphides were intersected but assays were required to confirm the type of mineralisation.

As for the Norseman project, drilling is now complete over 8,700m of the total ~10,000 targeted. GAL expects to start receiving the results from this program from mid-Jan onwards.

Next: We want to see the assay results from the Aircore drilling program at Norseman return palladium mineralisation which will form the basis for the target generation works on a follow-up RC/Diamond drilling program in 2022. We also want to see the Assay results from the diamond drilling in the Fraser range within the next 8-weeks.

Minbos Resources (ASX:MNB)

Early on in the week MNB announced that it had raised $6M via a placement @10¢ with the directors and management taking $595K of the capital raise.

MNB had $4.2M in cash at the end of the September quarter; with the extra $6m raised the company can focus on completing the definitive feasibility study (DFS) for its Phosphate project in Angola. Whilst funding the development of the phosphate production pilot plant.

Next: We want to see some more news with respect to the zero carbon ammonia project as well as progress and development on the phosphate production plant.

Province Resources (ASX:PRL)

This week PRL updated the market on its hydrogen export feasibility studies that are ongoing with its JV partner Global Energy Ventures.

The joint-venture is now running 4-streams of work concurrently and expects these all to be completed by the end of the June quarter 2022 with the ultimate aim of demonstrating the technical and commercial viability of compressed hydrogen as a preferred export carrier.

Next: More progress on community engagement and permitting, and a progress update on the scoping study with Total Eren.

Titan Minerals (TTM)

On Friday, our Ecuadorian gold play TTM released results from a further 22 diamond holes at its flagship Dynasty Gold Project.

This program is mostly infill-drilling, which means that there was expectations that the assays would return gold. This program is in place to enhance the upcoming reclassification of 2.1Moz gold (foreign) resource to JORC standards.

The stand-out intercept on this batch was 102.7m @ 1.44g/t gold from 46.5m depth.

Next: Assay results from their Copper Duke porphyry are anticipated in the coming weeks, further step out drilling at Dynasty and the reclassification of the JORC resource.

In our other portfolios 🧬 🦉 🏹

🦉 Wise-Owl

This week in the wise-owl portfolio we put out an updated article on our Wise-Owl pick of the year Evolution Energy Minerals (ASX:EV1).

We highlighted an interview with Amanda Van Dyke who is an EV1 board-member and Managing Director of the sustainable resources focussed fund ARCH that cornerstone the IPO with an $8m investment (owning 25% of the company).

Watch the interview here:

Screen Shot 2021-12-20 at 10.44.22 am

One of the comments that really resonated with us was that “Sustainable production is the only type of production the world wants right now” and how this could mean EV1’s ESG commitment makes its resources that much more available.

📰 Read the full breakdown: This ESG Fund is backing EV1 – what does this mean and why is it important?

On Thursday, our iron ore investment Iron Road (IRD) announced that a new institutional investor was now on the register. Bulk Commodities Holdings LLC of the USA has agreed to fund up to $5m in a placement, to assist IRD as it “continues to engage with potential partners” for Australia’s largest, development ready, magnetite projects near Cape Hardy in South Australia. We note that IRD can elect to opt out of the final $2.5m of funding, if it’s not required, limiting the dilutionary impact of this raise.

🌎 Mainstream Media:

Uranium (GTR)

WATCH: Uranium Market Minute – Episode 51: Supply vs. Demand About to Get REAL


A Wild, Emotional Year Has Changed Investing—Maybe Forever (Bloomberg)

Cyber Security (WHK)

Hackers launch more than 1.2m attacks through Log4J flaw (Financial Times)

Lithium (VUL, EMH)

Lithium prices soar, turbocharged by electric-vehicle demand and scant supply (Fox Business)

Hydrogen (PRL, EXR)

Macquarie trains sights on green hydrogen (AFR)

Nickel (GAL)

Market gets ahead of IGO nickel bid (AFR)

Biotech (DXB)

CSL shakes off pandemic woes, diversifies with $11.7B Vifor Pharma acquisition (MedCity News)

Have a great weekend,

Next Investors

General Information Only

S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

Conflicts of Interest Notice

S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

Publication Notice and Disclaimer

The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.

This article may include references to our past investing performance. Past performance is not a reliable indicator of our future investing performance.