Investors snapping up shares in loss-making ASX companies might be short-changing themselves in the hunt to find the next millionaire maker, according to experts.
Equities research platform MST Marquee has reportedly established that rigorously investing in unprofitable shares can be a surefire way to erode wealth.
Keep reading to find out how a portfolio full of loss-makers could have performed since the turn of the century.
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Why do Aussies love loss-making ASX shares?
Research conducted by MST Marquee, as cited by the Australian Financial Review, found strictly investing in only non-profitable ASX shares could have seen a shareholder lose 99.7% of their invested capital since 2000.
The research company is said to have built a model portfolio valued at $100 at the turn of the century.
The portfolio was then rebalanced annually, according to previous reporting, to remove companies that had since posted their maiden profits.
As of 2011, the initial $100 investment had eroded to be worth just $4.10. And, nowadays, it holds only 24 cents of value.
That's what an average compound loss of 23% each year will do, folks.
But it wasn't all bad.
MST Marquee senior research analyst Hasan Tevfik reportedly said the portfolio gained a whopping 37% in 2009. It was also said to have surged 60% between March 2020 and October 2021.
Interestingly, the risk of long-term losses apparently hasn't been enough to deter investors from buying unprofitable ASX shares.
Many market watchers appear to be on the hunt for the 'next big thing', with the S&P/ASX 300 Index (ASX: XKO) seemingly reflecting such ambition. Fifty ASX 300 shares were reportedly found to be posting red balance sheets right now.
Tevfik said, courtesy of the AFR:
Despite the dismal track-record, investors still buy these profitless companies … [they could] be hoping that a few of these birds will develop wings and start soaring like an eagle, perhaps.
While our birds-without-wings portfolio will be buying these stocks, we suggest other investors tread with caution.
However, there are likely plenty of diamonds to be found in the rough.
Indeed, Pilbara Minerals Ltd (ASX: PLS) only posted its maiden profit last month.
Shares in the ASX lithium favourite have increased ten-fold over the last five years, rising from 49 cents in September 2017 to close Wednesday's session at $4.94.
