When I started investing with Freetrade a little over a year ago I had never invested before, so threw some small money around in the app, making losses while also reading up on the community to see where I had made mistakes. I have learnt a lot but still have a way to go, but am now focussing more on ETFs and have opened a SIPP. Some of those first shares that I bought included Technology Minerals TM1 and I have averaged down a little over time, hoping that I am not catching a falling knife, although it won’t break the bank if I am.
I know that pre-profit companies are notoriously high risk and that buying these shares is a bit of an unknown and apart from board experience and apparent demand for the business, there is not much to go on.
Do you invest in pre-profit businesses and if so, what sort of sums do you risk and how do you gauge your appetite?
I would be interested to know how many people do or don’t invest in pre-profit companies and if they are serious investments or more of a punt? Please comment with any views.
I tend to have the bulk of my holdings in big profitable companies. There is still growth there and the risk of a big loss is far lower. I take much smaller positions if I’m buying a newer pre profitable company.
IMO the biggest mistake beginners make is trying to pick the next Amazon or whatever straight away. If you are going to stock pick far better to learn the ropes with safer investments.
Generally I prefer to invest in cash generative businesses where I can perform valuations drawing off of previous years and then plug in future forecasts. That said I will invest in companies that are yet to generate a net profit if the fundamentals look promising, this tends to be in the mining sector as I feel more comfortable attempting to put a valuation on those type of projects/businesses.
An example would be Horizonte minerals who is looking to become one of the largest nickel producers in the world and are currently on site at construction stage. Hopefully they will transition from explorer to producer but still a long way to go.
As you allude to there can be significant risk investing in these companies, especially when there is debt on the balance sheet. I prefer the more boring stable dividend payers!
I’ve made a few mistakes with pre(or minimal)-profit companies (Notably Roku, Docusign, Chewy).
Definitely more of a punt, and notoriously hard to value. What I look for is a minimum is a Non-GAAP profit and/or a profit in at least one quarter. Still, very risky if you don’t know the industry well.
To throw my two cents into the ring, I agree with Dave in the sense that it is mostly profitable, established companies I invest in. Rarely will I take the risk on currently non profitable businesses - although as a kicker that is down to my risk assessment for my portfolio.
Different people are at different stages of their investing journey and will have different risk appetites which will in turn influence their investment decisions - above all, I would recommend reviewing your risk appetite before proceeding.
As part of this statement, it is not financial advice and purely what I would consider in this scenario.
If in doubt, the best bet is to contact an independent financial advisor.
