I usually take pride in my measured approach to investing.
But recently, with my step into the micro-cap world of stock investing, I am being more strongly impacted by the surges of adrenaline and emotions that can heavily influence your decision making.
Your emotions can drive you to buy a stock after minimal research after seeing a sharp rise in share price, and the sudden feeling of missing out on quick gains (typically referred to as FOMO). Many people get burnt by FOMO as they time their entry poorly, and the price of the asset dips shortly after they buy in. For me, I am generally good at avoiding decisions such as this. But that’s simply because I want to get in on a stock before the run begins. And that takes a good amount of share price monitoring and company research.
But my emotions have caused me to make bad decisions, and below is an example of my most recent blunder
I bought into a company recently after some research. My entry point was quite good. The share price had been consolidating over a period of time and after buying my parcel of shares, the share price continued to track sideways, if not a little downwards.
But I was OK with this. From my research into the company I knew there was good potential for a substantial increase in share price in the near future.
But what happened really took me by surprise. And I suppose this highlights just how much I have to learn about investing in micro-cap stocks.
I have never looked at the top 20 shareholder lists for companies before. But it seems that this is a very common thing to do in the micro-cap world. The stock that I had bought is Core Litium (CXO) and one of their top 20 shareholders is a company called Yahua Industrial Group. Yahua Industrial Group is a company who, among other things, process lithium ore to battery-grade lithium hydroxide and, as of a week or two ago, have signed an agreement to supply Tesla with this product. The announcement that this company would be supplying Tesla with this lithium hydroxide, and the fact that they own more than 7% of CXO resulted in many people with deep pockets putting two and two together and drove CXO’s share price up 90% from my buy in price.
And when I saw this price jump, rather than sitting and contemplating what this all means for a while, I instead very quickly hit the sell button and close to doubled my money.
Now, I have always said that making any profit on any investment is a win. And something to be celebrated. But there’s a bigger picture in this example, and one that I should have observed before making my quick decision to take profit.
CXO are yet to build their mine. They have all the government approvals in place to commence construction, and funding is available to do so. Their mine is also extremely close to a port facility making transport costs incredibly cheap. And with Yahua having a high demand for their product, meaning that there is little risk in their product sitting in the port awaiting a buyer, there is every reason for construction of the mine to commence sooner rather than later.
Lithium stocks are also the flavour of the month with lithium prices on the rise and, with Biden taking the presidency, green technologies have a much more favourable outlook. It’s expected that electric vehicles will be more common than fossil fuel ones in the not so distant future. And with a recent article about a company creating a car battery that can charge in a matter of minutes I can see this being the reality.
So, in reality, I should not have hit that sell button. Sure, a 90% profit looked great. But after monitoring the CXO share price for a week or so and waiting for it to fall below my sell price, the dip never came. So I have bought back in at slightly over my sell price. And within a few days I am more than 30% up on my renewed investment. You can observe my dodgy scribbles in the image above that tells my story of entry, exit and re-entry.
The only saving grace in this situation is that I won’t have to pay any capital gains tax on that sale as a result of my shares being held in my trust. But for anyone else that would have been an expensive error.
I also bought a larger parcel of shares on this re-entry given that I am quietly confident that we’ll see a good increase in the company’s market cap over the coming 12-24 months.
None of this is financial advice of course, this is simply a tale of me learning via trial and error.
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