A quote from Ian Cassel that was shared by James Kwantes on the index this morning caught my attention:

"Big mistake: Don't sell your winners to buy more of your losers. Cut your losers quickly and take your profits slowly."

There are many different opinions on this subject, some people say "buy more at lower prices if the story hasn't changed." while others say "always cut your losers and ride your winners."  I think both can be correct and both are usually easier said than done. 

Having been an investor in this sector for more than 15 years I know from experience just how easy it is to buy shares in a junior based upon a good pitch and some light due diligence only to watch its share price proceed to sink week after week, month after month. In fact I have a handful of stocks in my own portfolio right now that are each down more than 50% and that I honestly wish i'd never heard about in the first place. 

How does this happen and how should an investor in this sector handle losing positions?

Well first of all there's no perfect answer to this question but I think there are some things we can look for that can help keep us out of trouble and avoid the biggest losses (or at least suffer fewer of them):

  • Not every stock is a bigger bargain at a lower price; the fundamental story can change for the worse and we shouldn't simply hold on because we're stubborn and "it's too cheap to sell now". It can get cheaper, trust me. 
  • Before buying a stock have a good idea of what you're willing to risk. Is your plan to buy more at lower prices? How big of a position are you willing to build? 
  • What are the catalysts you are looking for? What if the catalysts you are looking for don't materialize? How much time are you willing to give the company? 
  • Every moment in the market is unique and your cost basis doesn't matter. What matters is the risk/reward potential from this moment right now. Objectively analyze what the potential is for the company right now, and what is the probability of them achieving this potential? If you didn't have a position in this stock would you buy it now? (always a good question to ask and to objectively answer).
  • What's the chart saying? Use technical analysis. Don't hold on to a stock that has broken major support simply because you're stubborn. There will be opportunities to get back in at a later date (and probably at a lower price) if the story improves and the chart sets up again. 

Both Garibaldi Resources (TSX-V:GGI) and Novo Resources (TSX-V:NVO) are great examples of the last point; both stocks breached critical support last month and have continued to sink lower ever since:

GGI.V (Daily)


NVO.V (Daily)

Why hang on to a stock and suffer a further 30%+ draw-down when you can exit, clear your mind, and wait for a proper entry setup? No need to answer that, it's a rhetorical question. There are all sorts of cognitive biases that we are prone to as human beings which prevent us from admitting we were "wrong" and taking a loss in an investment. Conquering these cognitive biases that cost us money is probably the single most important thing a market participant can do in order to become more profitable. I strongly believe in this because i've seen it in my own results, and I have coached many others who have experienced similar transformations in their trading/investing results. 

Another concept that I believe is important to understand is that by the sheer nature of the junior mining sector there will always be big losses from time to time, it's simply the nature of the beast. I watched an excellent presentation by Joe Mazumdar at MIF in which he pointed out that Eric Sprott's portfolio has quite a wide variance of outcomes, and then his own portfolio from Exploration Insights showed returns ranging from -86% on the worst investment to a gain of more than 1200% on the best. Risk is the nature of the resource exploration sector and there are ways to manage it more effectively, but there is no way to avoid it completely. 

"Exploration is high risk/high reward, you can make a lot of money in two months and lose a lot of money in ten months." ~ Joe Mazumdar

What should you do with positions that are showing large losses that you've been hanging on to for a long time (more than a year)? I like to review my portfolio quarterly and ask myself why I own each and every stock that's in there. If the best answer I can come up with is that the stock is down a lot and "it's got to bounce at some point" then that's a sign to me that it's time to make a sacrifice to the market gods and sell this position. Try it, you will probably feel lighter and breathe easier after you exit a position that's been both weighing on you emotionally and financially.  

There is also an opportunity cost to holding a losing position, there are other opportunities in which one can invest that capital. Moreover, cash is a position too, a position which gives one more optionality in the future. Finally, remember that your cost basis doesn't matter much. What matters is where the stock is trading now and what the real potential is from here going forward.  Every moment in the market is unique, and the past has already happened. What is the potential from here on out? What is the risk?

Juniors are "burning matchsticks" and the longer it takes for a company to make a discovery or advance their projects, the worse it is for shareholders (more money spent, more share dilution, etc.). Have a plan and be conscious of risk as well as the value of time. Update your plan periodically and check in with why you own the stocks you own. It's too easy and costly to "forget" about our biggest losers and let them sink lower over time. Today I sold a position I had been holding for over a year and which I was down 60% on, I felt better after I exited and it prompted me to write this blog post. 


DISCLAIMER: The work included in this article is based on current events, technical charts, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. The views expressed in this publication and on the EnergyandGold website do not necessarily reflect the views of Energy and Gold Publishing LTD, publisher of EnergyandGold.com. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.