The last few weeks of 2019 and the first few weeks of 2020 were good to me. Gold stocks rallied hard and much of my portfolio benefited nicely. In addition, I had a streak of 12 consecutive profitable trades (primarily due to the strong end of year rally in precious metals and precious metals mining shares) . I also enjoyed doing a few interviews in which I talked about winning the 2019 CEO.ca Stock Picking Contest.
Some might say I was riding high and feeling good about things, however, in the back of my mind I kept reminding myself to stay humble and not feel too good. After all, having been an active trader since 2003 I have learned that the market has a way of humbling us when we least expect it. One of the critical traits of profitable market participants is a calm equanimity, we can never let ourselves get too high or too low regardless of what the market is doing.
“The good speculators always wait and have patience, waiting for the market to confirm their judgment.” – Jesse Livermore
If one finds themselves becoming too emotional or losing sleep over what the market is doing and/or how they are trading, that's a strong sign that it's time to walk away and clear ones head before returning to markets/trading. The market doesn't know we exist, and trading/investing is essentially like playing a chess game against ourselves; the market is outside of us and our choices (to buy/sell or do nothing) are ours and entirely ours. If you don't like the game or don't think you have an advantage then you don't have to play, you can wait for advantageous setups and situations where you DO HAVE AN EDGE before choosing to play. It is this calm and patient understanding of the art of trading that separates professionals who consistently pull profits out of the market from those who generate mediocre or poor results over the long run.
This brings me to the month of February. Everything looked so good heading into February - my account was at an all-time high, trades were playing out as I envisioned, and I was more confident in my portfolio positions than I can ever recall <~~~~ Perhaps that last point should have worried me more than it did.
It started with an announcement from Excelsior Mining (TSX:MIN) that the company was implementing upgrades to its production wellfield ahead of schedule. Nothing extraordinary, but this small change of plans from Excelsior pushed first copper production to the 2nd quarter as opposed to previous guidance which anticipated first production in March. It's a fidgety junior mining sector and investors have zero tolerance for a change of plans or being a month behind schedule. It also hasn't helped that the copper price has been bludgeoned as a result of corona virus fears and its impact on the Chinese economy. The result has been a nearly 30% drop in MIN's share price since the beginning of February:
MIN.TO (Daily)
Next up in the list of disappointments was Westhaven Ventures (TSX-V:WHN). Westhaven released disappointing drill results on February 6th and many investors proceeded to dump their shares after the company failed to hit any significant gold/silver mineralization in its step-out drilling south of the fault at the South Zone at its Shovelnose Project in southern British Columbia:
WHN.V (Daily)
Westhaven shares are down more than 20% in February and nearly 40% since the beginning of the year. Considering that this was my largest portfolio holding coming into 2020, this ~35% share price decline has left a mark and it hurts.
To top it all off, a few days ago one of my top picks for 2020 (which I started accumulating in September 2019), GoldON Resources (TSX-V:GLD), delivered drill results from its Slate Falls Project that fell short of market expectations. The market did not waste any time handing GLD shares a 40% haircut:
GLD.V (Daily)
Add it all up and toss in a substantially more challenging market trading environment and February has been the perfect storm; my year-to-date portfolio performance has gone from bright green at the end of January to a shade of light red despite the strong gold price performance. Excelsior, Westhaven, and GoldON were my top 3 largest holdings heading into 2020 so you can imagine that February has been rather brutal.
The point of this blog post is not to discuss the individual companies mentioned, however, I will say I still own all 3 stocks and I have actually bought more shares in the last couple of weeks. I have no illusions about the nature of many of my junior resource equity holdings - this is a risky sector that regularly experiences extreme volatility; if you can't handle experiencing regular 50% drawdowns in portfolio positions then you should not own junior mining stocks.
These sorts of drawdowns are also another lovely reminder of the importance of position sizing. I have a rule that I will never put more than 10% of my total account equity into a single stock, and come to think of it 10% is even a bit too high! 5% is probably more appropriate, especially for stocks with sub-$50 million market caps.
I'm a big boy and this isn't my first portfolio drawdown, however, that doesn't mean it feels any better. I find myself thinking about what I should have done differently and trying to draw some lessons from these humbling last few weeks. Part of the lesson is that this is simply the nature of the beast, highly volatile stocks will be volatile (both on the upside and the downside) and I just happened to catch a cluster of downside volatility. Another lesson is to constantly question my own theses and to trim positions when I start to become less confident as to why I own something. And the final lesson is to always be humble - the moment I start to notice myself feeling too sure of things it's a signal that it's time to be extra vigilant and remind myself of what can go wrong.
“The game taught me the game. And it didn’t spare the rod while teaching.” ~ Jesse Livermore
One more important thought is that the past has happened, we can't change it. These stocks have dropped and my portfolio account equity has adjusted accordingly. If I become anchored to past price levels or my all-time high account equity then I will not be able to make objective decisions/evaluations in the present moment. The market doesn't care about my cost basis on any given stock or where the stock was when I picked it as one of my CEO.ca Stock Picking Contest picks - all of that stuff is extraneous to the market and should have no bearing on my investment decisions today. In other words, if stock XYZ's fundamental story has deteriorated significantly and its future prospects are no longer promising then I should not delay selling my shares simply because the stock is trading below my cost basis or where my neighbor told me he thinks it will trade up to next month. I must remain objective and view the stock market, and my portfolio positions, with a calm and cool equanimity. There are just stocks after all, they are letters and numbers on a screen. Stocks don't have emotions, why should we have emotions about stocks?
Disclosure: Author owns GLD.V, MIN.TO, and WHN.V shares at the time of publishing and may choose to buy or sell at any time without notice.
Disclaimer:
The article is for informational purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. Readers of the article are expressly cautioned to seek the advice of a registered investment advisor and other professional advisors, as applicable, regarding the appropriateness of investing in any securities or any investment strategies, including those discussed above. GoldON Resources Ltd. is a high-risk venture stock and not suitable for most investors. Consult GoldON Resources Ltd.’s SEDAR profile for important risk disclosures.
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