Four largest current positions by value: REG, PGZ , FWZ and MAI, with Great Bear receiving a very special CautiousNow Hall of Fame Award. Other material positions: ADZ, ALDE, AU, BAY, EDGM, FPX, GQC, KTR, NRN, PRG, SMN and VRR. (Out for now, but expect to be back if the stars align or it gets really cheap again: CBK; GMV; ORE; VZLA; WHN.)
2023 SPC Picks: Betting my book yet once again by going with basically the three largest position sizes by value REG, PGZ and FWZ. (Honourable mention to MAI.) A base metals theme, with three significantly undervalued companies that seem likely to deliver a mine in due course and that are well positioned for major progress on their projects in 2023. All remain safely tucked away in the "don't worry, be patient" part of my portfolio.
2022 SPC Picks: Betting my book yet once again by going with the three largest position sizes by value-REG, PGZ and NRN. (Honourable mentions to VRR and MAI.) REG and NRN have been constants for me since the 2019 contest, so I’m hoping that doing the same thing repeatedly isn’t insanity, but, rather, patience that will be rewarded very well in 2022. Of course, hope is seldom a great strategy.
2021 SPC Picks: Betting my book again, other than for skipping GBR because of its current market cap: REG, NRN and VRR. Honourable mentions to ADZ, FWZ, MAI and PRG. Might 2021 be the year? (Might a clock be right twice a day?) Oops-2021 was not the year-985th.
2020 SPC Picks: Bet my book with my three largest holdings by value at the time: REG, NRN and GBR. Was hoping for a much better year than 2019. Ouch 933rd. (:
2020 Summer SPC Picks: Stayed within my book and a subgroup that has potential for both significant upward momentum and material news flow over the summer: ADZ, BAY and NRN. Hmmm-1055th place. It seemed like a very good idea in June. : (
2019 SPC Picks: ADZ, NRN, REG. Ouch-not a great showing (300th) after an 18th in 2018. Hopefully, just a year early on those picks!!
None of the comments I make should be regarded as offering investment advice, particularly with respect to any commentaries on individual companies following a Metals Investor Forum. I also do not have geotechnical training. For clarity, I have no commercial relationship of any sort with any company on which I comment beyond being a shareholder or a potential investor. I've begun to add the tag #BeCautiousNow (For Profits Later) as of late 2021 to those detailed commentaries to make it easier to find the collection.
I’m sometimes asked about the tag I use here. It’s basically a reminder to myself about how much I’d lost “investing” in the junior mining sector during what I refer to as my “RecklessThen” phase. It was particularly devastating to be fully invested in juniors, including RRSP, LIRA and RESP funds, during the 2008 crash. I’m reminded of those mistakes every time I look at my portfolio and see the large number of small junk holdings that have been subject to multiple consolidations over time.
I became more active in the sector again in 2016 around the time I joined the CEO.ca community, and told myself that I was going to be much smarter about my choices moving forward.
Recognizing that this sector is ultimately one of continuous learning, here are some of my very expensive learnings that may be useful to some of you, recognizing that I have a high risk tolerance and that it's still difficult to avoid old habits (especially learnings 10-14):
1. Most projects will be unsuccessful. There’s a narrative for every project that causes companies and investors to allocate time and funds to them. There are also more companies and projects out there than you have money. If you don’t have a very good answer about why you should make an investment in a particular project and company, you probably have a better place to put your money.
2. Opportunities are like trains-there’s always another one coming along. There are many active stories in this sector, and there’s always a new hot stock that someone is writing about. The potential for 10 baggers in this sector is such that there’s a huge fear of missing out (FOMO) factor associated with each hot story. Rushing to try to catch every train that is leaving the station based on what you’re reading on a chat board and fear of missing out is often going to take you to the wrong destination. There’s always another attractive story coming along, so we are typically much better served by doing suitable due diligence on the company, its management and the poster before choosing to board a train. This will admittedly see one sometimes missing out, but will also avoid some really big losses.
3. Remind yourself that you’re not as smart as you may think you are. This lesson might also be called “small dogs that run off leash can sometimes get eaten”. There’s a tendency to think that we know more than we do after acquiring a foundation of knowledge about this sector. This is particularly the case in a rising market like the summer of 2016, in which success is sometimes more attributable to having the good fortune to be in the right place at the right time than great stock picking. Thinking that we know more than we do gives a false sense of confidence and often leads to very bad choices, or, as Humphrey Neill once said, "Never confuse brains with a bull market." Particular care must be taken when considering something that doesn’t have a broad following by newsletter writers, analysts and people whose opinion you respect. Always operate on the assumption that there’s a reason other people aren’t following that story and see if your due diligence gets you past that concern.
4. Pay attention to people who are much smarter than you are. As the sector is inherently high risk, try to improve your odds by learning from other experienced people and seeing what they are saying. Getting a paid subscription to a highly regarded newsletter is one of the best investments you can make in this regard, as this can provide you a menu of choices from which to select based on your own investment criteria and risk tolerance. That being said, the newsletter writers all have some winners and some big losers, so it’s still important to conduct your own due diligence before you invest in any particular recommendation. If you’re disappointed with the overall track record of the recommendations, consider an alternative writer in due course.
5. Location, location, location. The jurisdiction and perceived jurisdictional risk are important to understand. Is it historically a mining friendly jurisdiction? Is there a major potential political change on the horizon? Are there growing concerns about the ability to obtain access due to increased concerns being expressed by local communities and NGOs? Even if the property is in a stable jurisdiction, where is the property located relative to potential infrastructure, such as roads, rail, power, water, people? Even if the project were to be successful in the exploration phase, are the logistics so unfavourable that it is unlikely to be mined without a very large increase in commodity prices? Is there a seasonality issue that will mean that there are long periods of the year in which there will not be any newsflow?
6. It’s about the market cap and share structure, not just the share price. What is the number of outstanding shares? Was there a recent private placement for which the hold period is coming to an end soon? What is the fully diluted share count, and is there an upcoming warrant exercise date that might create some downward pressure on the share price in the near-term? Unfavourable share structures will often lead to share consolidations, which are typically very unpleasant events for existing shareholders.
7. It’s not just the horse, it’s the jockey. It’s critical to look at the management team and the board and advisors. The reality is that people who have been successful before are more likely to be successful again. The risk profile is lowered when dealing with a team that has a history of identifying and advancing good projects and monetizing them in due course for the benefit of shareholders. They also tend to be better at being able to raise money. Strong teams will attract attention for their projects from the investment community, newsletter writers, analysts and retail investors who are loyal to the team. There are also always emerging younger teams who will be the successful teams of tomorrow, and they are often noticed first by industry insiders, which is another reason to subscribe to a highly regarded newsletter. There’s a big red flag if the team is one that has a sustained history of not succeeding.
8. The company needs to tell its story fairly, actively AND well. This sector is ultimately a beauty contest. Telling a sound story well is a required core competency of every management team. Choosing to be passive about the company’s story and letting the assets speak for themselves is inexcusable in this competitive market. Telling a good story poorly is just as bad. It is important for potential investors to understand if a company in which they are considering an investment is overly promotional, presents their narrative with reasonable diligence or is relatively passive in that regard. The consequence of a management team not managing that part of their business with suitable care and diligence sees a lower share price and greater dilution over time. Stale corporate presentations, an outdated website and presentations that do not instill confidence in the project and the team are enormous red flags.
9. Take the opportunity to speak with management, preferably face to face. I’ve been going to mining investment shows for many years, with a focus on only the Metals Investor Forum in recent years. I like to watch the presentation to see how well the company rep (preferably the President) tells the story to a room and to see the degree to which I sense passion and confidence in the project. I like to speak with the management attendees at the booth, to ask them questions and to hear them speak about their project by going off the script. Being able to look into the eyes of the key players allows me to get a much better sense of who they are and the degree to which they believe in their own project. Most importantly, it helps me better understand whether I want to bet on this jockey. If I end up watching the video or an interview at home, I am assessing not only what they are saying, but how they are saying it. Are they comfortable and confident telling the story? Are they able to respond well to questions? Is it clear that they believe in their project from the manner in which they speak about it? This is about more than whether I want to invest in the company - it also indicates the likelihood that others will choose to fund them or buy in the market.
10. Never fall in love with a stock. Although there are exceptions in which averaging down is the right thing to do when the price has declined, the odds are that an objective evaluation will dictate that the answer should be sell, hold for now with a vision of potentially selling after an upcoming event (e.g., stock back to a certain level or a project milestone that validates the decision to sell) or hold to reassess again later.
11. Don’t hold too much of one stock. This makes it much more difficult to exit. It also clouds judgment because of the increased risk of falling in love with that holding and/or being reluctant to take the loss and move on. Overexposure on any individual early-stage exploration play in particular greatly increases downside risk relative to a basket of them. When looking at position sizing, it is also important to look at relative sizing within the portfolio on a theme basis, such as early-stage pre-discovery exploration stories vs more advanced stories, potential jurisdiction risk and the mix between precious metals and base metals (as well as within those categories). Starting with a more modest initial position in a story also provides optionality to average up as new information changes significantly the risk profile of a flagship property, such as positive drill results on a pre-discovery story. One potential approach to take is to include a self-imposed limit on the size of an initial exposure that you break only on an exception basis for special opportunities, and this is particularly beneficial for early-stage pre-discovery exploration stories. You can then adjust that limit for any particular story as information becomes available that causes you to reassess the risk-reward equation significantly, such as promising drill results, a new significant discovery or a strategic investor that validates the project concept.
12. Always hold dry powder. It’s always beneficial to have cash that can be reallocated to new opportunities that emerge. I loved Great Bear when I saw the initial MIF presentation when it was around 50 cents. I still loved it when I saw the January, 2019 presentation when it was about $1.80. But I wasn’t positioned to buy on either occasion. (Fortunately, I was able to pick up a good position on material drops in March and May, 2019-whew!!) Having dry powder is particularly important late in the year when there are so many quality names on sale due to tax loss selling, portfolio balancing or impatience with a story that is advancing more slowly than the holder had hoped.
13. Don't get too greedy on a winning trade and don't worry about paying just a little more to capture a trade you really want to make that has a lot of upside. Jumping the queue and paying an extra half cent or cent will typically be immaterial if you’re right.
14. Always look at holdings through the lens of “relative value”. What is the real probability that something will go up more than XX% from here, and is there an opportunity that offers a materially better probable return than the retention of this holding? Suppose, for example, something has recently risen significantly, such that it looks like it might be at 85% of your target price and another quality opportunity looks like it could quite reasonably be a double or triple from the current level. It will often be attractive to leave some potential gain on the table to shift funds into the other opportunity. This is particularly the case during a period of high volatility. Inherent in this lesson is the potential benefit of always having a real-time sense of companies in which you may want to add or increase a position.
15. Always consider the different treatment for tax purposes within different account types when considering selling a stock held in multiple accounts. This is particularly important if you have accumulated capital losses that you want to crystallize. Here is a link to a post I'd done late in 2020 about some proactive tax strategies, including: (i) gains harvesting; (ii) the attribution rules and loans to a spouse; and (iii) in kind donations of shares to a charity, with some additional cautions about the artificial loss rules. https://ceo.ca/index?79be90933e15
16. Whether you're up or down in the market, it's important to stay grounded and remember the things of greatest importance in your life. In that regard, here's a quote from an article about lottery winners that resonated with me:. "...Quick money amplifies character, including a person's flaws and weaknesses. Money makes you a bigger version of who you are...."
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