Sell Your Losers and Move On

by FI Fighter on May 14, 2016

in Lithium, Precious Metals

laptop2

When it comes to investing, not every decision that we make is always going to work out. That’s mathematically impossible… Sooner or later, we are all going to end up buying an investment that we end up regretting later… Most people say, “Don’t get emotional with investing. Markets move up and down all the time, just deal with it.” Yes, that saying is very true, but it should never imply that you just simply hang onto your losers, either…

My Latest Failure

Most recently, I decided to cut the cord with Pure Energy Minerals (PE.V), a highly speculative junior mining stock that most recently came out with results of their latest drill program, indicating that, The results from wells CV-4, 5, and 6 included no significant lithium values…

No Significant lithium values…

In particular, if we’re talking about mining stocks, the resource deposit that a company holds is the vital lifeblood to its entire operations. Without that, you don’t have ANYTHING! So, what good are you to your shareholders? Sure, when disaster strikes, a company can always spend more time, effort, and $$$ trying to improve their results, but as investors, we’ve got to ask ourselves, “When there are literally a million other viable stories out there that are fighting for our hard-earned dollars, why would we want to waste our time trying to force-fit a square peg into a round hole?

As it turns out, I find it quite comical how easy it is for investors and speculators to fall madly in love with their investments… Or perhaps, it has more to do with not being willing to admit defeat? After the Pure Energy Minerals debacle, I browsed the internet for opinions, and what I found left me awestruck… You had such staunch defenders of this stock, that if I didn’t know any better, I would just as well assume that these people were the founders of the company themselves…

Why possess such a love affair for any company that is failing to deliver on their promises? Why is there so much devotion and passion?

The supporters, absolutely unshaken by the bad news, were quick to retort by saying:

  • “The news isn’t that bad! All the weak hands are just being shaken out right now… Stay the course!”
  • “This selloff is unjustified and totally overdone! Time to load up and buy more shares!”
  • “This is just a small hiccup… Nothing to worry about! I trust management to deliver and come through for all of us!”
  • “Anyone selling now will surely regret it later when the share price eventually recovers!”

 

And so and so forth… You get the idea…

Being Unemotional

What does it mean to be unemotional? When it comes to investments, to me it means analyzing them from the perspective of a non-owner.

For instance, when it comes to Bay Area real estate, I own 5 rental properties here, but I’ll be the first guy in line to tell you that it’s a totally crappy investment at this particular moment in time… The merchandise is completely overpriced, and I strongly feel that the local housing is due for a massive correction… The returns are terrible and not worth the effort at all… There’s not a snowball’s chance in hell that I would be out looking to buy anything related to Bay Area housing right now…

From my point-of-view, that’s what it means to be unemotional.

I don’t fall in love with my investments… I have no problem calling them out, and I don’t get offended or charged up if anybody else wants to take shots at them…

Go right on ahead, you probably can’t rip on my investments anymore than I already have myself…

So, when I make the mistake of buying trash like Pure Energy Minerals, or Rubicon Minerals (RBYCF), I can process the information calmly, come to a rational decision on what to do, carry out the action, and move on with my life.

I was wrong.

I made a mistake.

I lost this round.

I paid the price.

Forward march!

It’s as simple as that…

A Time to Hold, A Time to Sell

Don’t get me wrong, every investment must be analyzed on a case-by-case basis, and it’s impossible to generalize things… In many cases, the markets will punish a stock unjustly, so when that happens, no, you shouldn’t sprint to the nearest phone to call up your broker so that you can unload your entire position…

For example, back in January of this year, my gold mining portfolio was in the red by ~ -$60,000.

Here’s what the Depths of Despair can look like.

Market close on January 19, 2016:

Depths of Despair 1_19_16

 

There is a time to buy and a time to sell… When the Depths of Despair takes firm grip and an entire portfolio is bleeding profusely, that’s exactly the time when you need to be fully detached and unemotional… Unless any one story is fundamentally broken, no, contrary to popular belief, you don’t sell, but instead, you back up the truck and buy hand over fist!

As readers might recall, I was pounding the table, totally convinced that the gold mining shares were the bargain of a lifetime during the days of the January firesale. I likened myself as being, “A kid in the candystore.

So, it’s not that I can’t stand looking at DEEP RED… I’ve experienced that before and I will again in the future. That alone doesn’t mean I should sell…

But oftentimes, investors elect to hold onto their losers, and that makes no sense at all…

Again, if I was an investor who was sitting on the sidelines, there’s no way in hell I would be looking to purchase more shares of PE.V or RBYCF at this time… As a shareholder, why should I look at things any differently?

 

Don’t throw good money after bad.”

 

Loading up on shares during the Depths of Despair is NOT throwing good money after bad… Buying more shares of PE.V or RBYCF is!

I still vividly remember when the hammer came crashing down on Rubicon Minerals last year… As soon as the company announced problems with ammonia levels, a new CEO, suspension of milling activities, I said, “Red flags galore… See ya later!

After the share price of RBYCF started falling precipitously, many diehard Rubicon investors were clamoring to their peers to again, “Stay the course and buy more shares!” In their eyes, these bagholders were in this until the end (they were more or less gonna ride and die with the Rubicon thesis), so there was no turning back now… In their minds, these same ardent supporters thought that any deserters abandoning the sinking ship were “weak hands”, or unsophisticated speculators who didn’t understand how to invest…

While the worshipers decided to hang on for dear life, averaging down every step of the way, many other less emotional shareholders looked at the facts, and came to the conclusion that the damage had already been done… The Rubicon story was disintegrating right before everyone’s eyes, whether we wanted to accept that fact or not.

Those who bailed (like me), moved their funds into other gold stocks, and I’m sure for many investors, much of those early losses experienced with Rubicon Minerals have been remedied by the subsequent (much smarter) investments made.

Here’s how Rubicon Minerals has performed relative to its peers year-to-date (YTD).

RBYCF_GDX_GG_BTG_EDVMF_chart

  • RBYCF is down -58.2%
  • GDX is up 80.69%
  • GG is up 55.36%
  • BTG is up 112.7%
  • EDVMF is up 160.7%

And over the course of an entire year.

RBYCF_chart

 

So, tell me again, “What was the benefit of holding on to such a lemon?

 

Anyone who was too stubborn to say goodbye to that loser, RBYCF, is now down by -58% since the start of this year (-96.5% since last May 2015), and would have missed out on some MASSIVE GAINS that many of the other gold companies have been enjoying since the start of the early stages of this new gold rush!

 

The above example should clearly illustrate the permanent damage that can be done if an investor holds onto crappy investments forever and ever. RBYCF shareholders will need a Hail Mary to recover from this train wreck.

Afraid to Sell

I get it… People hate selling (it isn’t a popular strategy at all)… Investors dread it, and think that any kind of realized paper losses are a way of admitting defeat… Too many folks have too much damn pride, and don’t ever want to come to grips that they were wrong with their investment decisions… So, they like to spin things in a certain, positive way and scold the rest of us who do sell (from time-to-time), telling us that we are “irrational”, or “too emotional”, or “not well suited for investing”.

 

No, dude, that’s not it at all…

 

It’s called Opportunity Cost… It’s very real, important, and something we should all be cognizant of.

 

Look, I never expect to get all my picks and speculations right… I have made many mistakes in the past, and I will continue to make many more bad picks in the years to come… To me, that’s unavoidable and the cost of doing business… With that said, I have absolutely no problem cutting ties with fading stories, and redeploying my capital elsewhere.

 

Just last week, I took ~ -$1,400 realized loss on PE.V.

 

Big deal…

 

I sold the stock and moved on immediately, using the proceeds that were left over to buy shares of Altura Mining (AJM.AX).

 

Again, selling PE.V was NOT a rash decision (contrary to what one might suggest). The Clayton Valley lithium story changed for the worst, so my thesis was altered as well… In other words, had I held ZERO positions immediately following the press release by Pure Energy Minerals announcing poor drill results, and you asked me, “Which stock would you prefer to buy, AJM.AX or PE.V?

 

Without question, I would have chosen AJM.AX every single time!

 

So, I closed the books on PE.V, took my lumps, and moved on to something far more prospective. If the end goal is to make money, you aren’t going to accomplish that by trapping your money into bad investments… Sure, like the ardent supporters suggest, maybe after 5 years you’ll be back to break even, or slightly in the positive with PE.V… But you’ve got to ask yourself, “Is it worth the wait? What’s the opportunity cost of holding on?

 

In the case of both gold with Rubicon Minerals and lithium with Pure Energy Minerals, I chose to not speculate on potential turnaround stories that have a very slim chance of succeeding… I liquidated out of both holdings entirely and have no regrets. In this most recent example, I’m confident that shares of AJM.AX will recoup my PE.V losses and then some, over time.

 

Your investment thesis will NEVER stay static, and it will constantly evolve over time because everything is always changing. You just gotta be able and willing to roll with the punches. Nobody goes through life unscathed, never missing a beat, or without ever making a bad decision. You win some. You lose some. You just hope to win far more often than you lose.

 

It’s called life… Deal with it.

 

And then move onto something bigger and better.

 

Fight On!

{ 4 comments… read them below or add one }

1 chillywitNo Gravatar May 14, 2016 at 4:38 pm

A notable psychologist, Dr. Leon Festinger, discovered a phenomenon called cognitive dissonance. The basic idea is that the more effort or investment you put into an endeavor or object the more you’ll like it. You can think of cognitive dissonance as effort justification. For example, students rate academically challenging professors higher on class evaluations than easy professors. Or, people talk themselves into liking something simply because they paid more for it than a cheaper alternative, or when the item later costs less. i believe cognitive dissonance explains, in part, why people continue to hold onto losing stocks. It’s because they’ve fallen in love with the company and are searching for ways to justify why they don’t sell it.

Reply

2 FI FighterNo Gravatar May 16, 2016 at 7:01 am

Chillywit,

Thanks for those thoughts. I believe you are correct in your assessment that cognitive dissonance has a strong role in shaping our investment decisions.

Take care!

Reply

3 PowerPNo Gravatar May 16, 2016 at 5:29 am

Hi! I completely agree with the fundamental concept of this article but I don’t fully agree with the reaction on Pure Energy Metals.
Let me explain. Last news about “no significant lithium values” refers only on weels located on south area, other weels on the north part remain to be analyzed and as per site’s material this area is the most interesting because it has the higher lithium concentration.

I think Pure Energy Minerals has lost some potential but it hasn’t (still) failed to deliver its promise.
If ALL wells will have “no significant lithium values” than we’ll can conclude that the stock has lost all its potential.

Reply

4 FI FighterNo Gravatar May 16, 2016 at 7:04 am

PowerP,

You have a good point there, there may still be value in the Pure Energy Minerals play. My problem with the thesis is that investors will now have to wait until the summer, after another round of drilling, and/or the PEA in order for this stock to recover… In the meantime, the other lithium stocks could potentially keep moving upward, so it might be a losing proposition to wait out for the Pure Energy Minerals story to improve.

This is one of the main reasons why I elected to exit out at this time.

Cheers!

Reply

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