I posted the following on the AVZ forum recently and somebody hinted that I should post it on the Education forum. Perhaps obviously I could have included a lot more detail regarding entry and exit timing, particularly wrt the charts and capital raisings, but I endeavoured to keep the original post on the AVZ forum short and simple. Here it is:
My strategy for avoiding a huge loss on a spec stock is:
Research and pick sector. This time it is Lithium, but uranium speculation years ago was a good one.
Research and pick the 6 or more most promising early explorer stocks.
Buy into all 6 stocks. During the uranium frenzy my strategy was to buy equal $ worth of all 6 stocks. During the Lithium boom I bought different weightings across the chosen 6.
Wait.
Average up into the early explorers that are performing well.
Sell off the duds, but usually in 2 tranches in case I misinterpret the performance and miss a huge turn around.
Now say that I have settled with 3 winners, lets call them sure bets, and I have averaged up to the point that I am at my tolerance limit for my 'early explorer' sector, the next step is develop an exit strategy.
First note that it would be nice if an exit strategy is not needed, which would be the case in a take over scenario.
Typically I wait until after 12 months due to the CGT benefit.
I pay close attention to the often posted plot of sp versus time for the development of a company from early explorer through to producer.
I pay close attention to the sector performance in general. That is, if the sector collapses, not that I am expecting it for Lithium, then I will abandon all stocks. For example, from memory uranium reached 138 USD per tonne, then retreated. When uranium dropped back to 100 USD per tonne, this was an exit signal for me.
My 3 Lithium holds at the moment are AGY, AVZ and KDR.
My 3 duds that I sold for a small loss are .... not telling as I don't want to upset the true believers in those stocks.
