A year ago this week, I wrote about investing in lithium.
The title of the piece — “Should You Buy Into the Lithium Mania?” — hinted at my skepticism about the boom in lithium prices and lithium stocks.
I quoted Robert Friedland — well known in the mining community for speculative forays into the sector — who predicted: “The lithium market will end in tears.”
As it turns out, I was wrong — at least up to now.
Both lithium prices and lithium stocks have soared since then.
Sociedad Química y Minera de Chile S.A. (SQM) — the world’s largest producer of lithium –jumped over 75% in the past year.
Sociedad Química y Minera de Chile S.A. (SQM) versus the S&P 500 over one year
My Momentum Trader Alert service picked up on SQM’s recent surge and I recommended the stock two weeks ago.
Insight from a Lithium Expert
I recently had a chance to revisit my thoughts on lithium after connecting with an expert: my old friend Howard Klein of RK Equity.
Howard was in London last weekend with his son visiting friends and colleagues.
Howard reminded me that I had introduced him to his wife at my annual Christmas party in 1994. Fast forward 23 years, and our kids are playing together in Holland Park in London.
Today, Howard runs an advisory firm based in New York City.
Truth be told, I never dug into the weeds of lithium production.
But Howard has. And he is very bullish on the entire sector.
For the last two years, Howard has been recommending lithium-related stocks.
Nine months ago, Howard launched a newsletter titled “Lithium Bull” which focuses on investments in the lithium space.
Howard just sent me the most recent issue. The letter is well written and entertaining. Howard peppers it with memorable anecdotes ranging from Tom Petty concerts to his favorite characters from “Sex in the City.”
Howard tops it all off with bullish insights on lithium by Elon Musk from a recent Tesla conference call.
Howard is less bullish on top lithium producers like SQM. He says the large-cap lithium stocks are “priced to perfection.”
Microcap stocks — companies flying under the radar – offer better opportunities.
As Howard puts it, “self‐directed speculators can make individual fortunes, if they choose wisely.”
Howard highlights lithium miner Piedmont Lithium.
The company was founded by proven resource entrepreneurs with the backing of Ian Middlemas’ Apollo Group out of Perth, Australia.
Howard calls Piedmont the “The World’s Best Located Lithium Project.”
With two of the top five lithium producers in the U.S. located in Charlotte, North Carolina, Piedmont stands at ground zero for American lithium processing skills, facilities and know-how.
Howard expects a flurry of news flow about the company over the next few months. News of drill results, potential land acquisitions and even potential listing on the U.S. market could all drive the price higher.
How I Think about Investing in Microcap Stocks
If you’re like me, the potential upside of an undiscovered small cap stock always makes your pulse race faster.
I then take a step back…
Piedmont is currently listed in Australia and has a market cap of less than $50 million.
That means it barely meets the definition of a U.S. microcap stock.
There’s nothing wrong with that.
As an investor, just understand what you’re getting into.
I think of investing in microcap mining stocks as having a similar risk profile to Angel or early Venture Capital (VC) (“Series A”) investing.
As an early investor, you get a low valuation.
At the same time, the 10x and 100x returns lucky investors like are elusive.
Recall the textbook return profile for VC investments. Out of every ten investments, two or three will flop, and five or six will become the “living dead.” The remaining one or two make all the money. These cover the losses in the other investments.
With no “pure play” lithium stocks among the Big Four lithium stocks, companies like Piedmont have the wind at their back.
Still, I’d expect similar results from mining investments as other speculative VC bets.
How I View Investing in Lithium
I view investing in lithium the same way I view all investments: through the overall trend and risk management.
First, I see that lithium producers are trending upward. That alone argues for taking a position in your portfolio. The bigger question is how much to buy and when to exit if your position moves against you.
Second, I have to decide what role lithium will have in my portfolio.
Are lithium stocks just another asset class which can boost my portfolio’s returns at the margin?
Or do you want to bet big on a potentially enormous winner like Piedmont?
Do you want to be one of those self-directed investors who can potentially make significant personal fortunes?
Make no mistake — some private investors do just that.
Realize this second approach requires that shrewd investors go far deeper to unearth opportunities.
So before you plunge into lithium investing, I highly recommend that you educate yourself.
A good place to start on gaining this specialist knowledge is to join Howard Klein’s mailing list for his newsletter “Lithium Bull.”
You can drop Howard a note at firstname.lastname@example.org.
You can tell him I sent you.
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In case you missed it, I encourage you to read my e-letter from last week about how I like to take advantage of the “small-cap” effect in the stock market.