I have an explicit rule that I can only ever put 5% of my net worth into high risk stocks. I classify these stocks as being in two camps: Graham style value stocks or unprofitable companies with a net asset backing that is higher than the current worth of the shares. Currently I own two of these stocks: ADL (ASX:ADL) & BBW (ASX:BBW).
ADL, or Admerex Group, is an unprofitable software company with net assets per share of 250% of its current share price. It ticks off a few of the rules I apply to stocks but notably has poor management, an overly complex product and is pretty badly unprofitable with its cost base growing faster than revenue. I however have discovered that its software is the best in the business and if the management were to be fired for mismanagement the company could very quickly attain profitability simply by focusing on key markets.
BBW, or Babcock & Brown Wind, is a fund containing a vast number of wind farm related assets all over the world. When I purchased the stock it was profitable but the market had valued the company below net assets making it a true value stock in the Grahamian sense. In this case the discounted price didn’t present a decent enough margin of safety for me but the simple fact that I could own a stake in green energy production made me purchase the shares. In fact, if the company can continue to grow as it has shown signs of doing then I may hold it for some time.
I’ve been fairly lucky with these two purchases this year. Combined they have grown 38%, to 7% of my portfolio, but they could both just as easily vanish completely tomorrow. However, I’ll let you know in 12 months how they are going!
Note: I’m listing these stocks with the knowledge that you shouldn’t touch them with a 50 foot pole. I’ll never list my recommendations to earn money, aka my portfolio, but I will outline sure ways to lose it.