Want to Become a Millionaire? Think like a Geologist

by FI Fighter on January 3, 2016

in Precious Metals

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There is perhaps no other field out there that requires a person to possess more patience than is the case of geology. In the world of mining, it’s quite literally Man vs. Mother Nature. And as Mother Nature has demonstrated time after time, again and again over the centuries, it’s usually not a simple, straight-forward proposition with her!

Depending on which geologist you ask, some might say that the odds of taking a grassroots discovery all the way from inception through to full-scale production are on the order of 1 in 1,000; some would argue, it might be even lower than that, perhaps 1 in 5,000

In any case, the odds are definitely NOT good! If you were to ask anyone you know (even yourself) if they would spend decades chasing a pursuit that had a 0.1%, or 0.02% chance of succeeding, what kind of response would you expect to hear?

Hell no, I’m not doing that!

You would have to be a total idiot to sink that much time into an almost guaranteed failure! Might as well be more productive and buy a bunch of lottery tickets, instead…

Well, fortunately for the rest of us, there are crazy enough people (geologists) out there who are willing to put in the time and effort necessary to beat those seemingly unbeatable odds! These folks have the audacity to do so because they know that like most things out there, when there are tremendous risks involved, the rewards tend to also be spectacular!

Again, this rings more true in the world of mining than perhaps in any other sector out there… By making the right discovery, a geologist can go from ZERO to HERO almost overnight…

Personality Traits

Look, I’m not suggesting anyone out there quit their day job and start researching rockhammers to buy… But I think there’s a lot that we can learn from studying things from afar…

As I mentioned above, a geologist needs to possess the critical trait of patience because without it, they are doomed to failure… Mineral deposits can often take 5-10+ years to drill out and fully develop… and along the way, you can bet your last bottom dollar that Mother Nature will no doubt throw in some curveballs to make the task even more difficult…

A geologist needs to also be forward-thinking enough to have a good grasp of what the geology is telling them… Based on the empirical data and past experiences, there’s a time and place to continue drilling… But if the mineralization is proving to be one of those “narrow vein, highly complexed systems”, it might be time to bail…

The challenge, of course isn’t to just discover and prove out the resources of a deposit; when all is said and done, it MUST also be economic at whatever the market spot price happens to be (this requires a great degree of market timing luck)… Otherwise, no matter how great the find is, the minerals will just sit in the ground collecting dust. If market sentiment continues to be dreadful, well, you better execute even more patience until Happy Days can return again.

So, not only do you need a ton of patience, but a geologist must also have enough conviction to continue moving a project forward, all along the way remaining an eternal optimist… When times get tough (and they always do), you’ve got to have the perseverance to power right on through…

Ultimately, if you are right on your thesis, the returns can be tremendous!

In the case of Robert Friedland and his team:

Friedland turned his attention to Mongolia in 1999. With only $100,000 remaining in Ivanhoe Mines bank account, on the 153rd drill hole, the company discovered a massive copper gold ore body in the Gobi Desert at Oyu Tolgoi. Ivanhoe Mines then executed the largest drilling campaign in the history of the mining industry, over 1 million meters of diamond drill core, to delineate over $400 billion worth of reserves, which Friedland described as giving birth to a 100 kilogram baby.

It’s no wonder why geologists do the crazy things that they do…

When things work out, they REALLY WORK OUT!

Investor Lessons

As investors and speculators, we’re really not all that different from geologists — We are mostly in the game to make a boatload of money!

I would actually argue that our job is a lot less difficult because unlike geologists, we are not anchored to a single mineral deposit (that may or may not ultimately prove to be successful) and we have the luxury of being able to speculate on a whole bunch of different companies and projects simultaneously (this enhances our odds for success tremendously).

More so, a speculator doesn’t have to just go exclusively with grassroots exploration companies; they can elect to focus their capital on less risky, advanced staged projects. Pretium Resources (PVG) is such a late-stage development story… Sure, the company and its Brucejack deposit may still yet fail, but even if we conservatively place the odds of success at 50/50, that sure beats 0.1% or 0.02% (as is the case of the most green grassroots projects). Want to increase your odds further? Go add shares of the most proven, high quality mid-tier producers who can still manage to generate free cash flows in a sub $1,000/oz gold environment…

When a sector has been outright decimated, the baby also gets thrown out with the bathwater… So, even the best-of-breed producers are trading at bargain basement prices… In a buyer’s market, you can be extremely picky with your selections!!

Further, at any given moment in time, we can buy/sell positions at the drop of a hat… A geologist probably can’t quite so simply walk away from a project that is proving to be more disastrous than prospective…

Lastly, as investors and speculators, the Game of Rocks isn’t our full-time gig, so we don’t have to play 24/7… When the markets are in fact overheated, we can cash out all our chips and deploy our capital elsewhere…

Seriously, after witnessing this latest (and current) bear market destruction in commodities, who in their right mind would ever even want to participate in this space when it’s in favor!?!

That’s just asking for some serious trouble…

Nevertheless, we can learn a great deal from our geologist buddies; it is especially critical that we develop the traits of: patience, forward-thinking, optimism, conviction, and perseverance. Throw in a dash of luck, and we might just be onto something worthwhile!

Short-Term Memory

Recently, I had the privilege to interview Derek Iwanaka, Vice President of Investor Relations over at First Mining Finance. Derek was kind enough to remind all of us that despite the utter despair being radiated throughout the mining industry right now, this type of sentiment wasn’t always so pervasive, and it really wasn’t that long ago when the sector was outright booming…

As usual, people fail to grasp such realities because 99% of investors out there are far too myopic to think outside of the box. It’s unfortunate, but most everyone investing is just out looking for confirmation bias… We seek out ideas, opinions, and headlines to reaffirm our already held beliefs.

Everyone knows that mining has been a crappy business to be in these last 4 years, so everyone just naturally assumes that commodities will continue their downward spiral for perpetuity…

But really, how can anyone objectively argue why a sector that is already in serious liquidation should ONLY continue to underperform other asset classes forever and ever?!?

That just doesn’t make any freekin’ sense!! No asset class moves up or down in a straight line forever! Whether we are talking about the broader index, dividend growth stocks, real estate, commodities, etc., they all have their time in the sun and in the dumpster…

Right now, the S&P 500 and Dow Jones are sitting pretty, but it completely baffles me just how easily investors forget how dismal these indexes performed over the last decade…

Let’s take a look at how the S&P 500 and Dow Jones did relative to some senior gold stocks:

Screen Shot 2016-01-03 at 8.20.21 AM

In the early 2000’s, the broader stock market took a nosedive due to the tech boom fading out, and gold stocks staged an amazing bull run that took the sector to new heights from about 2002-2008.

In 2008, the financial crisis hit, which devastated practically all sectors… But for gold stocks, that spike down was very short-lived, and between 2009-2011, gold was soaring again with the spot price hitting over $1,900/oz

Pretty incredible run, right?

From January 2000-2010:

Barrick Gold (ABX) 119.56%
Goldcorp (GG): 1,283.89% 
Newmont Mining (NEM): 104.28%
S&P 500 (SPY): -21.98%
Dow Jones: -9.43%

Anyone who was invested in gold stocks during the last decade would have made a pretty penny (or even a fortune)… The same couldn’t be said for the S&P 500 or Dow Jones… In essence, from 2000-2010, it was a “lost decade” for the index investing folks…

But right now, the S&P 500 and Dow Jones are in favor again, so who really cares about such atrocious past performance (sarcasm)?

Ditto for real estate… San Francisco real estate can ONLY keep going Up, Up, and Up!!! Right?!? (even more sarcasm)

Well, that seems to be the general consensus right now at least… Everyone is buying up index funds and expensive real estate like it’s going out of style!

Where’s the forward-thinking? Once upon a time there was a dot-com bust… Then a financial crisis… The stock market has gone down before and it can absolutely go down again!! Contrary to popular sentiment…

As for gold stocks? Today, the typical investor wouldn’t touch that with a 100 ft. pole…

Instant Gratification

When it comes to investing and speculating, most everyone is out looking for instant gratification (another reason why we keep chasing assets that are already HOT!). This most definitely applies to income producing assets, which are the toast of the town right now. Whether we are talking about dividend growth stocks or cash flowing real estate, who wouldn’t agree that it feels damn good to get paid out passive income on a regular basis?

I love dividends!

I adore cash flow!

There’s a good reason why I own 8 rental properties and want to buy more in the future

But I won’t deny what the emotions and psychological effects of investing for income can do to a person… Yes, I no doubt invest into those assets because I want my cake TODAY!

Obviously, there is a time and place for that… especially if you want to achieve perpetual financial freedom… Nevertheless, I’m more than willing to put on the brakes when I’m able to locate better buying opportunities…

Right now, I simply see way, way, way more value in gold mining stocks than I do in any dividend growth stocks or cash flowing real estate…

And like the geologists are teaching me, I’ve just got to be patient as I wait for the tide to turn… Without a shadow of a doubt, I feel like I’m absolutely right on the thesis, though.

Some Cake Now and Later

It might seem counter-intuitive for me to suggest that owning income producing assets is akin to seeking instant gratification… Frankly, I doubt you will come across many owners of Procter and Gamble (PG), Johnson and Johnson (JNJ), AT&T (T), etc. who will accept the notion that they are investing more for today than tomorrow

We’ve all heard the rationale for buying into income producing stocks ad nauseum…

“Plant the seeds for future wealth”

“Compound a snowflake into a massive snowball”

“Build wealth one step at a time”

“Create an income tree with many branches that keeps on giving”

All of the above is most definitely true, and trust me I don’t mean to badmouth or knock income producing assets!

But seriously, how many folks investing in PG, JNJ, T, etc. are going to become millionaires over the next 5-10 years?

Unless you are sinking a sh!t ton of money into those stocks, that’s just not gonna happen for you. Think about it… EVERYONE and I mean literally EVERYONE has piled on into dividend growth stocks over the last 5 years (I was one of them)… That trade is awfully crowded right now, thanks to a Zero Interest Rate Policy (ZIRP) environment…

If it was really that easy, almost EVERYONE out there would be a millionaire!

You get into stocks like PG, JNJ, T, etc. for the income they produce both today and tomorrow… But let’s not fool anyone here… These companies are all large cap juggernauts who don’t have much room for future growth and expansion… By investing in these stocks, you accept the trade (whether consciously or not) that you will achieve passive income but relinquish any realistic shot at scoring some tremendous gains in the future.

Yes, these Dividend Aristocrats are reliable, which makes these stocks wonderful investments for anyone already in early FI… But if we are working towards early FI, there’s got to be a better shortcut way of getting there!

No Cake Now and All You Can Eat Later

What’s the alternative? Focus on deep value. Look for assets that are so utterly hated and despised that nobody wants to even mention them (for fear of embarrassment by association).

Today, gold mining stocks fit the bill… The first time I mentioned to a friend that I was investing in the space, they burst out laughing, nearly spitting out their water, they were so amused… 😉

Yes, it’s true that most gold mining stocks (especially the most prospective small caps) won’t pay you a dividend. But like most things in life, there are no free lunchesWhen I’m chasing deep value, I don’t want any dividends! If a company is able to pay out a respectable distribution (a token one is fine…), it’s because of one or two things:

A) The stock hasn’t bled enough yet (so much for deep value!)

B) The company is taking on debt to do so

Both scenarios are a “no go” in my book… At this time of writing, only ONE of the mining companies I currently own is issuing out dividends ($0.01 token from Eldorado Gold; EGO)… Again, to me, that’s a great thing… In a bear market, it’s best for companies to shore up the balance sheet and look for acquisition targets (buy low!!!).

So, you could go with the aforementioned dividend stocks who will give you some cake today, and a bit more later… like everyone else is doing…

Or, you could starve yourself silly for a few (or many) years, in exchange for potentially so much cake later that you won’t know what to do with it…

Turning back to our geologist friends, that’s basically what they elect to do when they drag themselves out of bed each morning… They literally toll away at “prospective” projects for a good 5-10+ years, in hopes of a massive payday later…

Until you are proven correct, though, the day-to-day grind SUCKS! And since most retail investors struggle holding stocks over a long weekend, good luck trying to convince them to ride out the storm for 5-10+ years, waiting for a “stupid” speculation to pay off… Outside of geologists, who really has the mental makeup to handle that type of “crappy” proposition?!?

It’s no wonder there aren’t that many millionaire retail investors out there…

The Ingredients for Success

Again, you’ve got to have a ton of patience to ride out the trade, but if you bet right (and by building a portfolio of say 20 high quality stocks you will certainly increase your odds of success tremendously), you could conceivably make more gains in a span of a few years than many investors will in a lifetime of investing.

That’s just the reality of the mining sector!

Boom and bust!

Over and over again.

The key is to NOT get into the space when it’s shattering new record highs! That’s when you want to sell, exit the stage quietly, and go play on a beach somewhere… 🙂

Going back to the Ivanhoe (now trading as Turquoise Hill; TRQ) example, the company literally went from bankruptcy candidate to multi-billion dollar market cap overnight with the Oyu Tolgoi discovery.

That’s how rapidly things can turn around in this space. Just like the mining business itself, the gold stocks mirror that same type of volatility. And I really believe that we will witness a similar drastic swing when market sentiment towards mining stocks finally changes again…

A whole new class of “overnight millionaires”, daring enough to play ball when no one else was willing to, will be minted.

I’ve got the conviction and perseverance to ride out this trade. Where does my optimism come from? Well, the mere fact that I’ve been able to buy up shares for pennies on the dollar is a good start. We are over 4 years into a brutal bear market that has seen the GDX and GDXJ indexes reduced by over 80% to 90%

For anyone who is just getting started today, consider yourself most fortunate! You’ve already got the luck element on your side because you managed to avoid much of the devastation that has hammered many people in the sector.

Right now may not be ROCK BOTTOM, but dude, we have to seriously be getting pretty close!

So, I’m NOT going to sweat the technique… I’m just gonna stay the course and if anything, just keep right on buying more shares on any significant dips. I’m taking many pages out of the geologist’s book because just like them, I believe that I’m entirely right on the thesis.

However, by getting into the sector at near the bottom of the Depths of Despair, I believe that anyone can do even better than your average geo… Whereas their odds for massive success are about 0.1% or 0.02%, you and me can easily put together (thanks to the ugly bear market!) a handcrafted portfolio of 20 or so stocks represented by some of the best management teams around.

There are no guarantees of course, but point blank — I expect to hit a homerun with this speculation… and you should too!

I’ve got gold fever!

Now, I’m just waiting for the assays of the 153rd drill hole to come back…

 

And I’ve got a strong feeling that I’m going to be ecstatic with those results! 🙂

 

Fight On!

 

Photo Credit: Kaminak Gold

{ 9 comments… read them below or add one }

1 Alexander @ CashFlowDiariesNo Gravatar January 4, 2016 at 3:30 pm

Ha im right there with you Jay. No one is on it now but its just a matter of time before the whole industry sky rockets up again. Now seems to be a great time to buy into mining stocks.

Even if you have to sit in it for a little bit and experience some more pain eventually it will get into high gear and we can all reap rewards.

I just recently bought my first batch of GDXJ and am excited to just sit on it for a bit. It actually went up 3% today which was great.

I don’t have the time or know how to properly analyze the mining companies so I figured the jr mining ETF is perfect for me.

Onward and upward my friend!

Reply

2 FI FighterNo Gravatar January 5, 2016 at 8:38 pm

Alex,

I’m right there with you buddy! I think tremendous gains are gonna be made in this sector, so that’s why I’ve started to back up the truck with my own funds…

GDXJ is probably one of the safest ways a speculator can play this… Since I like to buy/sell positions on strength and weakness, I prefer individual holdings, but you’re right, it takes a ton more work. It’s also way more risky to speculate on individual miners.

All the best!

Reply

3 XareltoNo Gravatar January 5, 2016 at 2:32 pm

Hey FiFIghter,

in Germany we only have 1 ETF related to gold mining stocks, which holds :

http://shchart.finanzen.net/chart.aspx?c=sh&p=fin&s=fonds&stime=0&labels=Newmont+Mining%3BGoldcorp%3BBarrick+Gold%3BAgnico+Eagle+Mines+Ltd.%3BYamana+Gold+Inc+%28Grundstoffe%29%3BEldorado+Gold%3BRandgold+Resources%3BKinross+Gold%3BSibanye+Gold+%3BNew+Gold%3BSonstige&values=16.44;14.1599;11.88;6.1799;6.0599;5.84;5.76;5.7399;5.6799;5.03;17.23

Is is something you would also consider?
I think it could go up 400-600% but not thousand percents with a singel pennystock.
But as i’m not rich and very young, would this also be a great opportunity?

Reply

4 FI FighterNo Gravatar January 5, 2016 at 8:43 pm

Xarelto,

I am unfamiliar with the ETF, but I am familiar with most of those holdings. Very solid. If gold rallies, you will do very well with such a fund. Lots of senior and mid-tier gold producers.

If possible, I would look into opening a foreign account that allows you access to trade directly on the TSX, TSX-V, and ASX. Those are the premiere exchanges for mining shares.

Take care!

Reply

5 BeSmartRichNo Gravatar January 5, 2016 at 3:16 pm

I have my eyes on Orvana and am currently bidding at $0.11 per share. It is a micro gold mining company that have been having positive cash flow for a couple of years including the most recent quarters. It has no long term debt and can sustain at this level for another couple of years. What do you think of the company?

Reply

6 FI FighterNo Gravatar January 5, 2016 at 8:45 pm

BeSmartRich,

I don’t know anything about the company, so I can’t really comment. At first glance, I see that they own a copper/gold mine in Bolivia… In general, I think I have pretty high risk tolerance, but Bolivia is one jurisdiction I would prefer to avoid…

This may be a sleeper, but it doesn’t fit my buy criteria.

Cheers!

Reply

7 KurtNo Gravatar January 14, 2016 at 8:30 am

I’ve forwarded this piece to my brother the professor of geology–he’ll be pleased to know he has personality traits consistent with financial success! 🙂

Reply

8 MortimerNo Gravatar January 17, 2016 at 9:15 pm

Love the analogy to geologists and patience—though I think it likely fits more with the magic of compound interest than to essentially winning the geological lottery of discovering $400b in minerals with your last few dollars. I don’t know much about the mining industry, but your advice on buying when the market is bottoming out is great advice—and hard to follow. With that in mind, what is your sell criteria? Some of the equities you mention did go up to +1000% or more, but your chart ends in 2009—and gold has come crashing down. If you sold at the right time, you would have done well. But if you waited… You might be back at square one, or worse.

Also, although the value of the S&P 500 might have remained relatively stable of the so-called “lost-decade,” that doesn’t account for the dividend income that those stocks generated—which historically has been about half the value of an equity. Just some different food for thought. I wish you luck in timing the market successfully and achieving early financial independence!

Reply

9 Rob @ Money NomadNo Gravatar January 24, 2016 at 8:05 am

This article is pure gold! I never would have thought to make being a geologist my goal. But smart and consistent now can lead to sexy later. Thanks for sharing and I’m going to start patiently digging around to make my millions.

Reply

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