Speculative Stocks

Portfolio title

If you’ve just tuned in, you should start by reading Part 1 of this maiden portfolio snapshot, where I went through my more sensible holdings: staid and steady diversified LICs and ETFs. At the very beginning of our investing journey about 6 months ago, my wife and I didn’t limit ourselves to those wise investments. We also splurged a little (too much?) on several different individual speculative stocks.

At the time, we were in the process of setting up our bank account streaming system based on the Barefoot steps (more on that in a future blog), which includes setting aside 10% of our income for discretionary spending, also known as the Splurge account. We had a modest amount of savings which we had decided to invest into the share market, so we put most of the savings into low risk stocks (we started with AFI and VGS, which combined essentially consist of all the biggest companies in the world) and with the remainder we splurged by speculating on individual companies.

Mrs Dividendum and I pretended that we were savvy speculators, and picked a few companies each to plonk a few thousand dollars into. Except that of course we didn’t actually know anything about business fundamentals or all that fancy jargon that investors throw around like PE ratios, moats, cash flow, and what have you. So of course we picked meme stocks that were the flavour of the month at the time.

London quote

My wife chose to invest in powdered milk companies, because she’s somewhat familiar with the industry through sending milk to her friends living in China. Her Chinese connections often ask her to post baby formula to China, because milk from Australia is a hot commodity there. There’s a general lack of trust in the local Chinese dairy industry, due to a couple of heavily publicised cases of milk contamination and corruption over the years, which resulted in a number of tragic infant deaths. So my wife has some idea of what types and brands of milk are in vogue. Unfortunately, when we looked the share price history of her most requested brand, A2 Milk (ASX:A2M) we naively concluded that it had already peaked, so we didn’t buy it, and then missed all the growth in A2M that continued.

Wattle logoInstead, she chose Wattle Health Australia (ASX:WHA), a much younger company which looked like it had great potential. We bought the first small parcel of shares for $1.87 each in late January. It was, and I think still is, in the process of applying for an importation license from the Chinese Food and Drug Administration (CFDA). Once that license is granted we expect a significant spike in WHA stock. From the day we bought it the stock has been extremely volatile, but mostly trending up, quite steeply. It reached $2.72 in late February. We were up more than 45% on our original purchase! Buoyed by this success, she next bought shares in Bubs Australia (ASX:BUB). Bubs has a focus on goat milk formula, which seems to be in rising demand in China, because apparently it’s gentler on baby tummies. Bubs seemed to move almost in lockstep with Wattle, which in turn seems closely correlated with the big player in the industry, A2M. Then tragedy struck.

BubsEverything was milky until the beginning of April, when suddenly Wattle Health suspended share trading.  The trading halt ground on and on. There wasn’t much information available about why the suspension kept being extended, except that it was still working on raising funds. In late May, after more than 6 weeks of being halted, Wattle resumed trading and announced it’s a few different plans for raising money. One involved a substantial loan that seemed to strongly favour the bank, with a high interest rate and an attached share entitlement offer for the bank, indicating that Wattle may have had difficulty securing the loan. The other big fund raiser they announced was a share entitlement offer open to existing shareholder on a per share basis, but with the new shares to be made available for purchase at only $1.25 each. That’s a massive discount from the share price before the trading halted, at $2.18. As a result of these announcements, the share price immediately tumbled, hard. In two days it dropped to $1.36, losing almost 38% of its value. Since then it’s been floundering around that price, and it seems unlikely to recover for the foreseeable future.  Luckily Bubs has had more promising developments, just yesterday announcing a partnership deal giving it access to a CFDA license to sell its products in China.

GXY logoFor my own contribution to our failed foray into speculation, I also jumped into the meme stocks. I started with a moderate tranche of shares in Galaxy Resources (ASX:GXY), one of Australia’s biggest lithium mining operations. I thought it was going to be a clear cut winner, because battery tech is inevitably going to grow, increasing the demand for lithium with it. I bought it at $3.90 per share in the middle of January. The very next day I got a sharp lesson in volatility, as it shed 10% of its value. It then continued to gradually decline for a while, subject to the whims of global supply and demand. It recovered slightly, and it’s now sitting at $3.42, leaving me with a loss of -13.4%. Unfortunately this isn’t even close to my biggest loss so far…

AC8 logoAt around the same time as I blundered into lithium, I bought shares in a few different Australian medicinal marijuana companies. I do think that the industry is very promising, and one day I believe that restrictions will be lifted and businesses operating in the cannabis space will flourish. That’s not to say I knew anything about their business CAN logofundamentals. Evidently lots of other people were also pricing significant optimism into their evaluations of the stocks, especially in January when I bought my shares. I tried to reduce single company risk by diversifying over four different companies: Cann Group (ASX:CAN), AusCann Holdings (ASX:AC8), Zelda Therapeutics (ASX:ZLD), and MGC Pharmaceuticals (ASX:MXC). Ever since buying, the prices have been plummeting. MGC has been my worst performer; it’s now sitting at a 47% loss. ZLD logoOuch! You know losses are bad when you stop bothering with decimal places… I seem to have a knack for buying when prices are at high peaks. Still, that loss only becomes real if I sell, so I’m holding on with grim determination, waiting for favourable legislative changes. Canada is already in the process of legalising recreational marijuana, and I expect the US to follow within a year or two. The North American export market should hopefully be a positive opportunity for Australian weed growers. MXC logoOnce Canada and America have taken the lead, I think Australia will eventually succumb to peer pressure and join the recreational pot club too, at which point the established players should have a powerful head start to pump out mad profits. To the moon!

We’re holding steady for now, as an exercise in determination. If we sell we lock in our losses, so that’s out of the question. I don’t think that modest speculation was a stupid decision in hindsight. At the time we had all sorts of sensible sounding reasons for choosing the stocks we did, but I think really it was just a bit of fun, which is fair given the splurge strategy we were adopting anyway. Obviously it would have been disastrous if it had been the core of our investments. It taught us a lot about risk and volatility, by watching the share prices over the following months. It also made me even more appreciative of dividends, because even though some of our diversified shares have gone down in price, at least they’ve already paid us a portion of their profits, which takes a bit of the sting out of a falling market. My approach to investing has evolved as I’ve learnt more about it, and I’m now focused heavily on building a growing dividend stream, so in future I’ll avoid anything that doesn’t give me cash flow. This dividend focus eventually crystallised with my discovery of the Thornhill investment approach, which I’ll go into more in a future blog.

Disclaimer:
Long in all the above mentioned stocks.
Nothing here is advice. Do your own research.
I do not endorse speculative investing. If you’re considering it, seek professional advice.

6 comments

  1. Aww Man! I think this although it is a tough lesson, is a great one to learn at this stage your investing careers. Even if you sold and locked in your losses tomorrow, investing back into your Core Portfolio. You both would have learnt some hard lessons about speculations, single stocks, timing the market. I am hopefully this won’t affect you guys negatively and will only help you with lessons learnt for the future!

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