How DroneShield fever ended in a brutal 75 per cent share price collapse
The lesson with DroneShield’s spectacular crash is to know the difference between your gambling money and your investing money, writes finance guru Noel Whittaker.
Shares are my favourite investment: they offer capital gain, no entry or exit fees, and you can trade in small parcels.
But those benefits come with a cost – when something is this easy to buy and sell, it can nudge even disciplined investors into a punt. I’m no exception.
There’s a cafe where I often have coffee, and a few regulars like to talk shares. This year the hot topic was DroneShield. Every time I walked in, they’d ask, “Have you got some yet?”
At my age you reflect on your investing history. I’ve received countless tips, and my record is simple: if I ignore a tip, the stock usually rises; if I buy it, the thing falls in a heap. So now I generally avoid tips – partly for self-preservation, and partly because my refusal to buy may help those who have.
My “investment” in Phoslock Environmental Technologies (ASX: PET) is a classic case. Six years ago, I was playing golf with someone who claimed to be an expert in small caps.
Naturally the conversation turned to hot stocks. Without hesitation he nominated Phoslock – a Chinese company that had supposedly found the secret to turning algae-ridden swamps into drinking water. It sounded like a winner, so I bought at 87 cents.
You guessed it – a few months later they received adverse publicity for fudging their accounts, the shares were delisted, and the price collapsed. It stayed there for years. Then two months ago my broker rang to say they were back trading at 0.006 cents. We figured we might as well hold them in case we needed a capital loss.
Four days later my stock tracker flashed a gain of 212% — the biggest percentage gain of my life, albeit on an amount too small to matter. The shares had leapt to 0.026.
Still, you can’t help wondering what might have happened if you’d taken the plunge. So every time the boys mentioned DroneShield, part of me wished I’d bought some. Another part figured that if it really was that good, I was probably too late anyway. I did nothing.
Which, as it turns out, was the right call. DroneShield has been in the news lately for all the wrong reasons.
It became one of the most dramatic sharemarket stories in years. Listed in 2016, it began modestly, then soared as defence spending boosted demand for counter-drone technology. In mid-January it was just 66 cents, yet it surged to $6.60 by 9 October. Everyone wanted in — my broker told me his phone was running hot with buy orders.
As Joe Aston wrote, “By late September the inboxes of Bellevue Hill, Rose Bay and Vaucluse were ablaze with DroneShield fever as old boys let each other in on an investment thesis so simple you can fully grasp it between mouthfuls of Château Margaux.”
Then in November, a series of negative events triggered a brutal reversal. Executive insiders, including CEO Oleg Vornik, sold tens of millions of dollars’ worth of shares, rattling confidence. Soon after, DroneShield retracted a claimed US contract. Their US CEO abruptly resigned. Within weeks of the October peak, the stock plunged 75%, briefly touching 58 cents. It’s now around $1.90.
None of this is new. Markets have produced such parables for centuries. Most great long-term fortunes in Australia have been built on patience, discipline, quality assets and the reinvestment of dividends – not speculation.
The lesson? It’s human nature to want a punt. That’s only a problem if you punt with money you can’t afford to lose. Know the difference between your gambling money and your investing money.
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Originally published as How DroneShield fever ended in a brutal 75 per cent share price collapse
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