Some Investing Strategies I Try to Keep in Mind

With the precious metal market heating up I get some emails and messages from people who are keen to learn about investing in this space.  Contrary to most newsletter writers etc in this space I tend to focus on Investing Theory because I think it’s more important than being a geologist or a mining engineer (We are INVESTORS after all). The best investors on MinTwit, in my opinion, are neither geologists nor mining engineers. Thus, I decided to throw together a couple of concepts I think is important to keep in mind for maximum long term wealth accumulation in this risky sector…

Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime

1. For maximum long term compounding potential the downside risk is much more important than upside potential
   • You cannot compound lost capital and the opportunity cost will be significant in the end
   • Margin of safety is very important
2. Something that is cheap based on the sum of its parts will probably need certain catalysts to force the market to get “rational”
3. Have a longer investment horizon than the average market participant
   • Everyone is impatient and short term, expected catalysts can often lead to overvaluation
   • A catalyst longer than 3 months in the future often feels “too boring” and will therefore not be fully priced in today
4. If you feel the need to watch your investment all day and every day then you are probably too heavily invested
   • You might be right and might end up making a killing but it is very stressful in the meantime
   • Stress/greed/fear can often cause bad decisions like selling too early in an uptrend or selling too late in a downtrend
5. You will never be able to catch every “rocket”
   • Don’t regret missing a lot of “rockets” because you certainly will
   • But regret and learn from bad decisions such as not investing in a “no brainer”
6. Vast majority of drill plays will fail
   • Don’t be afraid to take profits before assay results if the story is very popular and a high chance of success is already priced in
7. Everyone will probably have one good trade to boast about but remember that it’s the overall portfolio performance that is all important
   • Speculators who bet extremely heavy on super risky drill plays will only need to be “unlucky” once to blow up their portfolio
8. I do not actively look for ten baggers because just finding probable 1-baggers over a 12-24 month period has a higher success rate and will lead to extreme long term gains
9. Majority of people will not beat an index in the long run but almost everyone makes it sound otherwise
   • Do your own Due Diligence and be extremely picky of who you “follow”
10. Assume that the market is clueless, and that the current price of a security is meaningless and then make up your own mind
11. Risk is paying for something that ends up not being true and/or overpaying for something that ends up being true
    • Look for cases where the risks everyone is talking about is already priced in and then some…
    • I would buy an infinite amount of free lottery tickets if the chance of success is 0.1% (heads I win, talks I don’t lose anything)
    • Find stories where you cannot readily imagine what would need to happen for the intrinsic value to be lower than it already is
12. Just because someone is a good geologist or mining engineer does not make them good mining investors/speculators
13. People, People & People
    • Invest in honest and competent people who work for success and not just a salary
    • If you invest in a good team then time is your friend (Good management solves problem, bad management creates problems)
    • The less you know about the mining sector the more important people becomes
    • Good management team don’t want to waste their time, money and not yours either by extension
14. The obvious is obviously wrong
    • There is no opportunity in the obvious
15. Diversification to the upside should not be ignored
    • A company might need one good target to be a success which means…
    • That there is a stark difference between a company funded for one bullet versus an explorer funded for multiple bullets…
    • The former needs a 100% hit ratio and the latter might just need 25% if said company is funded to test four targets for example
16. Everyone is biased
17. Aim to understand every story better than most market participants and learn to shut out the noise from uninitiated investors and traders
    1. Again, most will NOT out perform an index in the long run so odds are that most opinions you hear are from the ones who will under perform an index
18. Know why I invested and what I need to see for the case to be intact
19. Investing is a marathon and I do not need the market to tell me I am “right” as soon as I have bought
    • Most of my new positions ends up being down before they go up
20. A 1% position that becomes 50 times more valuable will affect your portfolio the same as a 50% position going up “just” 100%
21. I want to see insiders with a lot of skin in the game
22. The risk/reward is often a lot better after a discovery hole even though one might need to pay up 50% or more
23. Sound investing theories/strategies > Knowledge of geology and mining engineering
24. Getting even 1% better at investing will compound for the rest of your life
    • Strive to get better each and every year because the cumulative profit in the end will be greatly impacted by this
25. I never base an investment on a higher future gold price
    • … Because it means that if I’m wrong on either the case or price of gold = Failure
    • If the investment makes sense today and at a lower price of gold then chances of success increases
26. Iffy target/deposit/project in an iffy jurisdiction is no bueno
    • No one wants to spend a lot of money and put a marginal project into production in a marginal jurisdiction
    • A tier 1 asset can get built almost anywhere
    • A tier 2, or lower, will need either a very low cost area (great economics) or political stability (money spent will not be lost)
27. Focus on tier #2-#1 targets when it comes to exploration
    1. There is no shortage of drill targets out there but there is a shortage of good drill targets
28. If price goes up, all else equal, the opportunity is poorer and vice versa

Elaborating on a few of the concepts:

Having a longer time horizon than the market…

When a catalyst and a story is well known it will often lead to “hot money” plowing into the stock right up until whatever news release. If I can see a catalyst that is a few months off then usually hot money will not be bother to get in and said catalyst is often not priced in.

Risk is overpaying for something that turns out not to be true or turns out to be worth less than thought at least

I constantly hear risk X, Y and Z being bandied about but seldom do I hear what the possible impact would be. If I for example find a story where the current Enterprise Value is already backed up by what is known then the risk automatically is to the upside. Being in a position where “defeat” is very much improbable means that “victory” is highly probable by default. Unfortunately it often feels like the more risk that is already discounted (cheap) the more risky it feels.

Regret bad decisions not missed “rockets”

Accept and be content with the fact that you will miss the vast majority of “ten baggers”. It’s almost impossible to know what stock WILL be a ten bagger becase the very reason it MIGHT become a ten bagger is because the future is incredibly uncertain. Personally I think it is a disservice to fellow investors to encourage the “hunt for ten baggers”.  First of all: If one is correct that we are in the early stage of possibly the biggest gold bull in history then one does not need to be super speculative in order to have great returns. Second of all: Putting a lot of focus on ten baggers usually means betting heavy on short term drill results. Given that most drill campaigns will not be successes, and that many drill speculations are bid up going into drill results, the risk/reward for such a strategy is often very poor. Now I own stocks I think CAN be ten baggers but those returns are something I expect over a period of 2-3 years and NOT from a single “risky” catalyst.

Having a longer time horizon than the market

Lets say that the marginal buyer/seller affected by fear/greed, is affected by the momentum of a stock and has a maximum time horizon of 2 months. That would mean that stocks going higher into a near term and well known catalyst will be very attractive to buy. On the flip side it would mean that a stock that has been trading down for a while and does not have an obvious catalyst within the next 2 months is considered unattractive.  Again, I obviously think it is a mistake to build a case on a single, near term catalyst.

Not to chase ten baggers

“Ten baggers” or better will by default be highly risky/uncertain. Especially if the time horizon is short and there is little to no margin of safety. If you can continuously find 10 companies that will PROBABLY average 50%-100% within a 24 month period then getting rich is just a matter of time.

Limit downside risk

Permanent losses are extremely detrimental to long term results. By permanent losses I am not talking about typical short to medium term portfolio swings but by having bought something higher than it ends up being worth. In other words I am talking about stuff happening which means that intrinsic value becomes less than price paid for the investment.

Diversify upside risk

A company that is funded or will most likely have funding to test 10+ targets is less risky than a company with funding for a single target. The former needs to get lucky once out of 10+ times and the latter needs to get lucky at once.

Anecdote

I think my biggest mistake so far was being quite heavy into Aloro Mining (not to be mistaken with Eloro Resources which is a current holding) for reasons stated HERE. Aloro basically had one shot at hitting something right next to Alamos Gold’s Mulatos mine in Mexico. Now, I’m not saying it was a bad “bet” because the did not hit a bulls eye in the holes they drilled but because:

1. Gold market was quite depressed and access to capital was scarce…
2. Which meant that the company had just a few drill holes that needed to hit for the market to get excited and allow more fundraising
3. No margin of safety aka nothing banked already that would cushion any negative news on the downside
4. Did not really sell anything going into assay results even though share price had risen quite nicely on drill speculation

In short:

It was a true high risk/high reward play which could have easily become a 10+ bagger if they would have indeed hit a bulls eye given the proximity to a potential buyer in Alamos Gold. I bet too heavily and I guess I started to read in too much in the SP rise. In hind sight I should not have been as have as I was in a junior with money to drill a single target and which had nothing backing up the valuation on the downside.

Note: This is not investment advice. I am not a geologist nor am I a mining engineer. This article is speculative and I can not guarantee 100% accuracy. Junior miners can be very volatile and risky.

Best regards,

Erik Wetterling aka “The Hedgeless Horseman”

www.thehedgelesshorseman.com

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