Tax Loss Season (Why I’m NOT Scared)

by FI Fighter on November 11, 2017

in Mining Stocks

Well, tax-loss selling is basically upon us, and right now a great fear for many mining stocks investors (particularly those dabbling in the North American markets) is that there will be a steep decline and sell-off event! As if this year wasn’t already painful enough for many of these stocks, we’ve now got to brace ourselves for yet another potential headwind!

As someone who has been invested in the mining sector since summer 2015, yes, you could say that I’ve seen this song and dance a few times before…

Am I scared?

No.

The one thing that I’ve ALWAYS believed to be true in my investing career is the following:

Buy low and sell high.

It sounds simple enough (in theory), but quite honestly, it’s a damn difficult thing to do!

I don’t always get it right, and many times I do in fact get cut up trying to “catch a falling knife”, but hey, like I say:

You can’t win em all! Take your wins and losses in stride and live to fight another day… Mining stocks are a lot like the game of baseball… You don’t need to get a base hit every at bat to end up in the Hall of Fame.

From AZ Quotes.

Baseball AND mining stocks!

So yeah, try your best to not sweat the technique so much…

Unless you are a short-term swing trader, quite frankly, I think it’s far more important to focus on the fundamentals than the technicals when looking at a price chart. In other words, pay closer attention to where we stand from a Risk/Reward perspective when trying to “time” entry/exit points…

For myself, as many readers know, I’m more of a market cycles type of guy and much of my investment thesis is predicated on a macro trend of increasing metals prices… I pay more attention to that BIG PICTURE, as opposed to getting too caught up with day-to-day investor sentiment (which is prone to changing on a dime!).

In my own eyes, if you can locate deep value, look at is as a great gift and buying opportunity more than anything else…

And in regards to tops/bottoms, yes of course it would be ideal to be able to perfectly catch those and make out like a bandit… Some folks are better at timing than others, but realistically speaking, it’s damn near impossible to do it consistently b/c the markets themselves are so unpredictable! Seriously, if it was that easy, everyone would be a gazillionaire, right?

With that said, I really don’t care if I buy a stock and then it proceeds to sink lower immediately afterwards… I just wanna be able to catch ~60% of the ride… The bottom 20% and top 20%, yeah that would be nice to have too, but that sixty is really where the bulk of your gains are gonna be made, so who really cares?

From Rick Ackerman (thanks to @KevinS for sharing this important chart!).

It’s all about that 60% baby!

As always, let’s use some real-life examples for illustration purposes…

Ivanhoe Mines

Back in late 2015/early 2016, I first learned about the Ivanhoe Mines (IVN.TO/IVPAF) story and the more I researched into it, the more convinced I was that it was a SCREAMING BUY. The company had the goods, the management team, the right partners, etc. and I just could not for the life of me understand why the stock kept selling off…

Buying low and watching it sink lower really felt like “catching falling knives”…

You know, it’s funny looking back with the benefit of hindsight, because I vividly remember sharing this stock idea with so many family members, friends, and honestly, not a single person I knew in my own personal life was convinced enough to buy in…

It just felt like one of those treacherous value “traps”… The technicals were horrible, and so many people were just waiting for shares of IVN.TO/IVPAF to get cheaper and cheaper and cheaper… At one point, I was down over -30% on my shares of IVPAF… but I just smiled, because I was that convinced that the stock (and underlying macro picture for base metals) would improve over time… Obviously, I didn’t know when the turnaround would occur, but as the popular saying goes:

Buy right and sit tight.

I was content enough to do just that…

Well, fast forward to early 2017, and like they say:

The rest is history.

Ivanhoe Mines turned out to be My Greatest Investment Ever.

But when it was dirt cheap, for realz, almost nobody wanted to touch it!

Here’s what I think the popular investor narrative/sentiment was back then and what it developed into as the story unfolded and the share price recovered…

Hindsight makes everything look obvious… but really, sometimes it’s extremely worthwhile to pay close attention to what other people are saying (and doing)… When everyone is super bearish, it’s probably not a bad time to go bargain hunting (presuming you are indeed buying QUALITY, which was certainly the case with Ivanhoe Mines)… When everyone is super bullish, yeah, it’s probably not a bad time to hit the sell button…

Again, you probably won’t be lucky enough to catch the bottom 20% or top 20%, but who fucking cares?

With Ivanhoe Mines, I made the bulk of my purchases somewhere around C$0.70/share and sold most of everything around C$4.00/share

Still plenty good enough for me!

Pilbara Minerals

The next stock is going to be my favorite reference point moving forward for fundamental investing. Pilbara Minerals (PLS.AX/PILBF) is a high quality lithium developer located in the Pilbara region of Western Australia. Despite making tremendous strides and progress towards advancing their Pilgangoora project towards production, the stock was ABSOLUTELY HATED over the past year!

I first invested in shares of PLS.AX at ~A$0.60/share, watched it slide down to ~A$0.35/share, and then observed it painfully stagnate around a very tight trading window for over a full year!

Zzzzzzzzzzzz…

My friends who had read my articles and picked up on the Pilbara Minerals idea back in the summer of 2016 were totally mad at me, readers were mad at me…

I was mad at me…

Yes, I was so frustrated with the share price, I even had to write this article for Seeking Alpha back in April…

Fundamentally speaking, the company just kept getting stronger but the share price kept getting weaker! It was almost baffling, and of course there comes a point when even the most ardent believers start to waver… and many eventually gave up and threw in the towel…

I must confess, I even sold out of my position in PLS.AX near the bottom (yes, I know I am a moron!)… I grew that frustrated…

And it was a HUGE mistake!

I did everything wrong with Pilbara Minerals and didn’t have the patience to see this trade through…

Look at where we stand today!

What do you know? Here’s another case of a HIGH QUALITY stock finally figuring out a way to breakout of a nasty, technically FUGLY downtrend and soar to new heights!

Naturally, investor psychology with this stock was all wrong, and many people (like my dumb ass) missed out on some massive gains because we either refused to buy low, or refused to wait for the turnaround!

Also quite naturally, if you read the forums today, you’ll find many folks with a serious case of Fear Of Missing Out (FOMO), who are now more than happy to fork over A$1.00/share, but who were scared shitless to buy at A$0.35/share

Fancy that… It ALWAYS feels safer to buy at/near tops than it does to buy at/near bottoms!

That is so ass backwards…

Look, I’m not saying PLS.AX/PILBF isn’t a good buy at today’s levels and that investors still can’t make solid gains… But objectively speaking, of course things don’t look as good from Risk/Reward perspective… That major moonshot up has already been made!

When it feels damn good to buy, it’s probably not the most opportune time to do so!

And funny enough, when the share price was weak and the stock was susceptible to “tax-loss selling”, investors were shaking in their boots and too afraid to buy!

But what about now?

Today, wouldn’t most anyone salivate over having the opportunity to load up on shares of PLS.AX at A$0.35/share? A$0.40/share? A$0.60/share?

See, now we’re just squabbling over pennies!

What looks like a big fucking deal in the heat of the moment, usually turns out to be an inconsequential (and microscopic) move once the macro trend reverses course and is in our favor again! Don’t sweat the fractional pennies that ultimately won’t mean jack shit to your total returns!

But I don’t need to go on and on about investor psychology… You readers already know full well that it’s human nature to want to chase things up into record high territories as opposed to backing up the truck when the HIGHEST QUALITY merchandise is selling off for pennies on the dollar…

Everyone likes to believe they are contrarian, but do their actions really suggest that to be true?

With Pilbara Minerals, I was definitely NOT contrarian, and I fucked this trade up, to say the least…

Critical Elements

Speaking of “squabbling over pennies”, here’s a REAL LIFE conversation I had with a good buddy as it pertains to doing just that with another lithium company, Critical Elements (CRE.V/CRECF).

Back when I first discovered Critical Elements, CRE.V was trading at around C$0.34/share

Like I said, in the “heat of the moment”, we like to nitpick and scrutinize down to the fractional penny…

On the morning of May 20, 2016.

Yup, squabbling over fractional pennies…

Paying market price? What are you crazy?!?

Can’t believe I’m paying market price. Ugh.

Dude. C$40 million market cap.

The micro view vs. the macro view…

And looking at things now, with the benefit of hindsight…

To date, I am sitting on a six figure win (realized + unrealized gains) with Critical Elements, but the natural question I ask myself is:

Why didn’t we back up the truck and buy a whole lot more!?!

The macro view took over 1 full year to really play out for this story…

But if you’re ultimately proven to be right, all that nitpicking over the nitty gritty details just looks comical in hindsight… Right?

Silvercorp Metals

Lastly, here’s an example illustrating why I don’t necessarily wait for breakouts before loading up on stocks that have a depressed share price…

Let’s take a look at Silvercorp Metals (SVM), a silver producer with operating mines in China.

The people who love to play Tuesday Morning Quarterback (TMQ) will all act like they have a crystal ball and can accurately predict the future… They’ll be the ones clamoring on and on about how you should never buy low and wait for a breakout to occur before loading up aggressively…

Well, in the case of Silvercorp Metals, we had that breakout occur in September…

Right?

Umm, not quite…

False breakout!

Silver and gold aren’t going anywhere… haha, just kidding!

And the FADE back down can be quite painful too!

So, yeah, this shit happens… all the time.

Straight up — Fundamental analysis works and technical analysis works too! They both work and they both fail… There is NOTHING that works 100% of the time!

For the life of me, I can never and will never understand how some people have the audacity and nerve to act like they fucking know everything and can pinpoint to the fractional penny where a company’s share price will be trading at in the future…

I mean, how much hubris must you have to operate with a mindset like that?

For f sake, I will ALWAYS openly admit that I don’t know jack shit about anything!

I swing and I miss… a lot!

But the above example illustrates why I don’t necessarily believe that waiting for a “breakout” is always all that reliable… Like every other approach, it can fail too!

Just something to keep in mind…

Conclusion

Tax-loss selling doesn’t scare me at all…

To me it’s all just noise…

For myself, I know that my portfolio is mostly comprised of beta mining stocks that won’t really move all that much on their own accord and will need the macro view of the underlying metal to improve profoundly in order for these stocks to make their explosive gains… But should explosive gains actually occur, all this tax-loss selling “noise” will look like a minuscule blip on the radar (see Ivanhoe Mines, Pilbara Minerals, Critical Elements as prime examples)…

In the meanwhile, if tax-loss selling happens, great more discounted deals! If some of these shares want to sell-off further, be my guest, I’m happy enough to be a buyer in tranches, averaging on the way down if I feel that the company has strong fundamentals and the Risk/Reward is looking more and more appealing.  If tax-loss selling doesn’t intensify for some of these companies, whatever, life goes on…

I really don’t care for trying to pinpoint and catch the exact market top/bottom because I’ve accepted upfront that I will never be skilled enough to actually be able to do so (outside of just getting stupid lucky)…

Humans love to complicate the hell out of everything… So yeah, don’t sweat the technique… I mean if you are really petrified of tax-loss selling, you can always DIVERSIFY… You don’t have to go “all in baby” on just one stock, ya know?

Anyhow…

The Game of Rocks oftentimes requires it to be a Game of Patience… In this day and age where we all demand instant gratification, that can be too daunting a task for investors…

 

But hey, if experience has taught me anything, if you want to make big gains (particularly with beta mining stocks), a lot of the time, you just gotta:

 

Buy right and sit tight.

 

Which roughly translates to…

 

Buy low and sell high.

 

Fight On!

{ 8 comments… read them below or add one }

1 VinNo Gravatar November 11, 2017 at 5:34 pm

I bookmarked this article for when I get really demoralized ???? LOL @ the above-mentioned Silvercorp example. Since this is my largest holding it’s like hearing myself talking.. I can’t be bothered though. Great fundamentals, and that what counts at the end of the day. In the meantime I’m using excess cash, and adding bargains like Balmoral, Metal Tiger, and some of Pibara spec plays. Ps. Have you had a look at Pioneer Resources? On the ceo.ca chatroom I found that the guy who ‘found’ Purdys is claiming that there is more of this on Pioneer’s, and Kairos’ ground. I’ve seen the Twitter pics ‘proving’ this before he went offline. Intriguing stuff.. Ive bought a few shares. Let’s see what happens. A good read on this bloke is found here: http://www.perthnow.com.au/news/western-australia/pilbara-gold-rush-wa-man-who-found-gold-strikes-deal-of-a-lifetime/news-story/711d10e05d715d67e2798b5ac0f68991

Thanks for helping us, and keeping our eyes on the ball!

Reply

2 FI FighterNo Gravatar November 13, 2017 at 9:50 pm

Vin,

Great names you got listed there! Yeah, it’s tough times right now but we just have to hang in there.

Thanks for the Pioneer tip, I’ve been reading up on it but haven’t made a move just yet…

Take care!

Reply

3 ChillywitNo Gravatar November 13, 2017 at 6:11 pm

Jay,
What’s your current opinion of KLDX? It’s getting hit and looks subject to tax selling. I’m thinking of doing some tax buying to it. I’ve been watching KLDX since you bought and sold it, but never pulled the trigger myself. It’s a very interesting company led by a savvy CEO that buys properties on the cheap from other mining cos that already invested a ton of money in them and couldn’t make profitable.

Reply

4 FI FighterNo Gravatar November 13, 2017 at 9:46 pm

Chillywit,

I like KLDX, it’s a solid mid-tier producer and location is great, all North American assets.

I haven’t had a chance to dive into the earnings release numbers but the shares look oversold to me… As tax loss selling intensifies, there could be a lot of good value here. Right now, producers are simply not working… When they deliver performance, the share price is flat. When they miss, the shares tank.

In a bear market, there is no reward and all risk…

But at low enough prices…

All the best!

Reply

5 JohnNo Gravatar November 13, 2017 at 9:23 pm

Curious about KLDX as well. Took a massive dump in the last month before you sold out.

Reply

6 FI FighterNo Gravatar November 13, 2017 at 9:49 pm

John,

I got out of KLDX at a slight profit, selling at $3.60.

http://fifighter.com/precious-metals/2017/09/portfolio-update-reshuffling-the-deck-september-22-2017/

We are at $2.29 and closing in on late 2015/early 2016 lows… That’s a very pronounced drop!

As mentioned above, at low enough prices, the R/R starts to skew heavily towards reward side, even in a crappy bear market environment.

Cheers!

Reply

7 RiadaNo Gravatar November 15, 2017 at 9:02 am

What are your thoughts on Teranga Gold? I understand you sold off awhile back, and it has been tanking over the past 6 months. I have held onto a small position on the way down and wonder if a recovery is on the horizon. Fundamentally, what do you think of Teranga Gold as it reaches new 52 week lows?

Reply

8 FI FighterNo Gravatar November 15, 2017 at 9:45 am

Riada,

I see deep value with Teranga that the market is not appreciating right now. At $1,270/oz gold (and higher), the company is able to generate free cash flow and is in much better shape now than it was in say late 2015/early 2016, when gold was hovering around $1,100/oz…

But the share price is basically at those lows… Banfora is somewhat marginal, but there is a lot of value here, despite the declining share price.

Teranga is definitely on my radar… unfortunately, like most things, there is only so much capital and too many good deals out there.

Cheers!

Reply

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