Coach''s blog...Saturday, April 1, 2007.
Today I want to touch on the importance of having patience and discipline when participating in the PM sector, and illustrate my comments with two recent examples.
I think the most important factor to generate the best investment performance is to know what you own. You have to buy for a reason. This PM bull market will ultimately be strong enough that you can probably buy anything and hold it for a while, and make money. Even the pigs will fly. But right now, there is a weak sentiment, and even the very highest quality juniors are flat. So it is of utmost importance to understand which stocks offer high value, and to buy them for a reason. Know what you own, and why it has better potential, and do not be discouraged if the market is unwilling to assign a premium at this time.
There is a gambling instinct in most people that buy PM juniors to begin with. And part of the thrill of 'gambling' is the lure of instant gratification. It is not just the success that some people crave, but the action. So the temptation encourages people to sell good stocks if they are not moving, and buy garbage just because it was going higher last week. That is dangerous.
There is also a crowd physcology component to the sector. People like to think they can time the market, and investors move in groups according to the prevailing myth that is in style. For example, the 'sell in May' rule of thumb already has some people looking nervously at their calendars. I know several people who have confided in me that last year was so bad in the spring selloff that they will not ride it out again this year. Again, that is dangerous. There is no law carved in stone that dictates that every spring the entire sector will get creamed for 30-50% losses.
I would argue that the more a market believes something will be true, the less likely it is that that event will come to pass. There are reasons for a spring selloff, as many investors and brokers flee the market to vacation with their families and enjoy the summer months. There is also a seasonality to the gold and silver commodity pricing, with summer months tending to be weak. However, if people note that the sector has been flat in March, and dread the spring selloff with the potential for sharp corrections, then I would suggest that some people are selling right now.
This seems to be supported by the evidence of the HUI recently. It used to be that a very close correlation existed between the HUI and the price of gold. When gold was up, the HUI component stocks were also green. Lately, we have seen the HUI trade weakly during gold positive days, and trade sharply lower when gold is down. I think we are seeing people selling the rallies to position themselves for the summer. And it is only March.
Last year, the end of March until early May proved to be the best returns for the entire year. A speculative frenzy occurred, and that set the stage for the severity of the correction that followed. This year, I suspect that widespread selling has already occurred, and if we get a nice April run, it will not see the same degree of a selloff in the late spring.
So know what you own and why. Do not be tempted to sell to protect small gains, when in fact you could miss the big runs. Understand that the market requires participants to be patient in order to succeed. The biggest mistakes that I have made during the last 4 years has been when I sold. Even if I was 'right' for a few months, over the long term, the juniors that I sold almost always powered to new highs thereafter.
Consider the example of Virgin Metals (V.VGM), a stock I wrote about in September. I bought shares at around 30 cents, and for many months the stock went nowhere and my investment was underwater. I was tempted to just sell and deploy the money into a hot stock many times. I held on, because I understood that VGM had an economic deposit that was severely undervalued by the market. Just last week, VGM caught fire as another wave of moly-mania appears to be hitting the sector. The stock reached the high 60-cent range, providing me with another double in my PF. I have since taken some profits to hold free shares, but the point is simple: in just six months, I doubled my money because I understood that I owned a quality junior in a bull market, and eventually my patience would be rewarded.
Consider my second example, Silverstone Resources (V.SST). Again, I included this stock on my top-5 picks list, because it was a high quality junior that was under the radar and out of favour, trading in the 80 cent range in December. The company controls numerous highly prospective silver projects, all of which had past producing mines, and each had historic resources that suggested a great silver resource remained to be exploited, with strong additional discovery potential. This month, SST has taken off, and with a tight float, I believe there is still significant upside potential. The catalyst has been a deal for SST to acquire silver production from Capstone Mining at a discount, and there will be a nice profit spread as that silver is sold at spot prices. SST shares traded as high as $2.50 before profit taking kicked in, and I expect them to trade above $3 in April. So the investors with knowledge to understand the play, and patience to hold it, could be rewarded with 300% gains in just 4 months.
It is not supposed to happen that way in the real world. This type of performance is outstanding, and yet so few people were on hand to see the gains, because they became discouraged when the stocks were not strong a few months ago. There are many other juniors like BGL, DIB, and EXM that come to mind where the same positive upside potential is there waiting for investors to realize the gains once the premium gets bid back into the stocks.
Know what you own, and why, and have the patience to see it through. The sky is NOT falling, and even if we get some spring weakness, the follow through in the fall/winter months will more than reward those who buy and hold. One should not expect triple digit gains in just a few months, but it is right there waiting for the smart investors who can play the game and win.
cheers!
COACH247
Voluntary disclosure: I own shares in all of the stocks that I have referred to, that were purchased in the market. I do not have a promotional relationship with any of the companies mentioned. EXM is a pending sponsor of my website and will pay a cash fee to have their advertisement appear on a forum.