THH -Miners: Yes it is a “Rigged” Game, But it Always Changes

In a bull trend (Increasing sentiment):

• Companies go up without having to create value
• Good news gets immediately rewarded and often even rewarded too much by the marginal investor

In a bear trend (Declining sentiment)

• Companies go down on no news
• Companies might go down on good news
• Companies really go down on bad news

Why is this sector so (mentally) hard?

Well, take the current picture for example. During extremely pessimistic sentiment a company might come out with good news which increased the VALUE of the company and it leads to no immediate gratification via an increase in PRICE. If the same company came out with bad news which decreased the VALUE of the company it would lead to immediate punishment by Mr Market and would go down in PRICE. This also happens regardless if the company is already incredibly cheap and the VALUE did not drop enough for the PRICE of the company to have been too high even before said news…

This is why it often feels like investing during such times is a “lose/lose” scenario. Why? Because if you take on risk, such as drilling and assaying risk, one might not be rewarded or even punished almost regardless of scenario. If they hit something that objectively positive it might not be enough for a depressed Mr Market to reward current holders. If they drill dusters then current shareholders will sell and a depressed Mr Market is not buying a single share to pick up the slack…

What ends up happening is that one can experience incredibly long periods of time, like the last 17 months, where one appears to have drawn the short end of the stick regardless of how “right” one might have been (there are always exceptions). This is the anti-thesis of the truism “a rising tide lifts all boats”. It is incredibly mentally taxing to be a buyer for 17 months straight and have Mr Market spit in your face over such a long period without ending up feeling like you are “doing something wrong”. Make no mistake, 95% people take Mr Markets action as due diligence and personal judgement. It’s hard to believe one is doing something right if Mr Market says otherwise for 17 months straight. This is why “capitulation selling” is so fascinating. By definition something is the best buy when it is absolutely the cheapest it has been. So why on earth would someone sell an ounce in the ground for $1/oz when the same ounce was valued at $10/oz two years ago? It certainly cannot be because the seller came to the conclusion that he/she is owning something that is overvalued. Instead it is a mixture of a) Collapse in confidence after being told by Mr Market that one is wrong for 400 days in a row and one can’t cope with being “called” dumb, stupid and wrong one more time, b) Starting to believe that risks increase as price declines and when almost all risks imaginable are already priced in one uses Mr Market as Due Diligence and assumes that everything bad that can happen, has indeed happened, and one is simply the last to know (aka “The market knows something”), and c) One starts to believe that because Mr Market is not rewarding good news and not reflecting the fundamental value one perceived was in place, that he will never reward it, and that one should go hunting in a sector that “works” instead…

A fellow investor said this the other day:

“As you are always pointing out to people, don’t let the fears and crushed sentiment of other people collapse your confidence in your own due diligence analysis.”

An industry veteran gave this great “mental tip” about how a bear is the mother of the next bull:

“The mental exercise I use to keep myself sane is that these sell offs in mining stocks are a just proxy for how many projects are getting shelved / delayed. Low stock prices = no capital = no development = no supply. Or as the saying goes, the cure for low prices is low prices.”

In short:

During a bear trend with declining sentiment one appears to be taking on RISK with NO REWARD. Meaning that if I own a stock and am expecting good news it might barely revalue higher or even go down on good news. If news is bad on the other hand I will often see a sharp decline in share price. At face value this, again, translates to RISK with NO REWARD and only a fool would take such a bet…

However there is a flip side to that coin. When we enter a bull trend with increasing sentiment we will often see returns of 100%-200%, from sentiment low to high, without a company having added much in terms of value. If a company comes out with good or at least exciting news we might see a big revaluation higher (undeservedly so). Case in point would be Garibaldi Resources which reached a Market Cap of around $400 M on drill hype alone  and before any actual assay results were out (No risk or fundamental change but great reward thanks to sentiment). Bad news will often see a soft reaction and there might even be a lot of “bargain hunters” that find a company “too cheap” when it is down 10% even though it should be down lets say 30%. So in a sentiment uptrend it becomes REWARD for NO RISK and even when bad news rears its ugly head we often just get a slap on the wrist.

… So in a sense being invested in a highly sentiment driven sector is like playing in a rigged casino at face value. During sentiment downtrends it’s often a lose/lose proposition, which is why it is so frustrating, and the house will make you poorer on paper. It’s akin to putting money on the Roulette table and lose a lot if it ends up on red and lose some if it ends up on black. In contrast, during sentiment  uptrends the game is rigged in our favor, and we win a lot more and a lot often than we deserve.

What most people end up doing is of course to get in when it feels easiest (near sentiment peaks) and then sell out when it is hardest (near sentiment bottoms). In other words they might catch a bit of the ending move up during the good times and walk away in disgust during the hard times. The gains they were able to accrue on paper as they caught the last part of the bull leg will often not cover the paper losses ,which they turn into real losses as they sell, at the end of the bear leg. Basically the majority gets in too late (way after the bull leg has started) and leaves too late (way into the bargain territory when they should be buying while the next leg up gets closer).

An ounce that is worth $10 in the ground might trade between $2 and $20 dollar as sentiment oscillates between high and low. Our job is to buy ounces for $2/oz and sell at $20/oz. You can only buy it for $2/oz when no one wants to buy it and everyone wants to sell it.

The longer and deeper a correction lasts where the game is “rigged” against us the closer we are to an upturn when it is “rigged” in our favor…

The secret is KNOWING that the tide ALWAYS CHANGES. ALWAYS.

• What Mr Market is not pricing today it will price in tomorrow.
• What Mr Market is not rewarding today it will reward tomorrow
• … And then it flips to the opposite for a while before flipping back.

Round and round we go and the hardest thing to do is a) Sticking to your plan and b) Have the patience to wait as long as it takes.

By definition the BEST BUY will be when the maximum amount of people have sold out for irrational reasons that have nothing to do with the value they are buying. The longer and deeper a correction is the more people will be selling because confidence, patience and common sense fails. I am buying every week because I am front running a period of time when value that has been created will be reflected and when the game is rigged in my favor. 17 months ago I barely owned a stock that was not showing a paper profit. 17 months later the majority are showing a paper loss. 17 months from now I expect most of my current positions and any buys around these levels to show a paper profit.

I have been steadily buying because I want to be fully exposed to the future game which will be rigged in the favor of all my holdings. As the Price to Value gap expands my invested dollars are buying more assets which will be revalued one day. The opportunities during the depths of a sentiment bottom expands exponentially with my purchasing power. There are a ton of juniors that have put out great news over the last 17 months. News that blatantly hiked up the intrinsic value by a lot. Still they are down some 30%-50% over the same period. I want to buy as much banked and potential value as I possible can BEFORE the rigged game turns in my favor and all of that will be reflected (and more) again.

Best regards,

The Hedgeless Horseman