Playing The Piano: Screening And Letting Opportunities Come to You
A few things to consider…
The junior miners are so cheap, on average, right now that there is really no need to go sifting through the trash bin. Identify the companies with great management, money in the bank and high quality projects. Put all companies of interest in a watchlist and simply use any new dry powder in the ones that you think provide the best risk/reward. There have been a few companies which tick all boxes except PRICE. Meaning that yes I think they are great companies but compared to the rest of the watchlist the R/R is not as favorable as I would like it to be for me to invest. One day said company might for whatever reason have become cheap and then is when you strike. I don’t think it is a good idea to “force” a case…
If there are just a few opportunities where I think the R/R is great then I will just own a few stocks. If there are lots of opportunities then I will own a lot of different stocks. I don’t believe in diversification for the sake of diversification. It makes no sense to me to have 5% in a company that I think has a probable 50% upside within 12 months and have the same amount of money in stock I am not even sure if it is undervalued or not. I simply rather have 10% in the former.
If I like 5 companies about the same and they are all trading at levels where the R/R is good then I might own them in equal amounts. If two of said companies go up 25% (with no fundamental change) and one company goes down 20% (with no fundamental change) then I typically sell some of the ones that went up to put in the one who went down. This is what I simply call “value trading” and I think it is an important concept when it comes to making money in a negative or neutral market environment. Never forget that the pendulum always swings…
A stock can go down 10% in the blink of an eye just because a single shareholders might be “fed up” with it or have any of a thousand reasons to sell that are not strictly “rational”. This is where it is your job to take advantage of the “irrational” event. It’s easier to do this when you a) have conviction and b) assume that the market is always clueless. If you have no conviction (don’t know why you bought it in the first place) then you will get scared when it goes down and are more likely to join the irrational seller. If you assume that the market is always efficient and right then you will also lack the fortitude to be a contrarian.
When I have a high conviction and a stock keeps sliding I have the opinion of “The market is getting more and more stupid… Thanks for the future returns!”. If I would have low conviction I would probably think “Oh my god, the case is getting worse and worse!”. The latter makes it impossible to ever buy low even though it is what everyone says one SHOULD do.
