Tread Carefully Into Lithium Stocks

Have you ever based your investment on an assumption? It’s not necessarily a bad thing if you do. Nothing wrong with a little speculation. But know that you are speculating, not investing.

I hear people say all the time that future demand was the reason they jumped into a particular stock. Take Bellamy’s Australia Ltd [ASX:BAL] as an example. Investors had no idea about Chinese demand for infant formula. Sure, they love Aussie products, and BAL’s profits were rising on the back on Chinese sales. But without a crystal ball, you had no idea whether growth was sustainable.

As it happens, demand for Australian infant formula hasn’t fallen off a cliff, but BAL has. Due to unforeseen circumstances, the company is having problems distributing its product in China.

So what’s the next ‘hot idea’?

Lithium is one. Aussie punters are piling into lithium stocks, hoping future demand will make their investment worth it. There’s definitely a possibility that it could turn out wonderfully for lithium investors. We are seeing the rise of electric vehicles, which will likely be the primary driver for lithium demand going forward.

As reported by The Australian Financial Review:

Lithium Australia is one of a bunch of lithium companies hoping to cash in on booming demand for the metal – a key component in the lithium ion batteries driving the energy revolution because of its lightness and high energy density. 

Australian developers of lithium and cobalt deposits are enjoying a “second commodity boom” thanks to the battery boom, the industry department says in its June Resources and Energy Quarterly.

But how do you pick the companies likely to benefit from the battery boom?

This is the hard part. You could learn a thing or two from our resource guru, Jason Stevenson. In his advisory service, Resource Speculator, Jason covers everything resources, from lithium to agriculture.

But like shareholders of BAL learned, don’t count your chickens before they hatch. Who’s to say the lithium stock you pick will be among the handful that supply the electric car market?

When punting on stocks, make sure you only invest what you’re willing to lose, because you might end up losing your entire investment on a stock you think is certain to succeed.

Regards,

Härje Ronngard,

Junior Analyst, Markets & Money

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Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.


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