How to Make Money with Mining Stocks (A Simple Chart)

by FI Fighter on August 30, 2016

in Lithium, Precious Metals

gold - 1

Mining stocks are extremely volatile… They spike up and down routinely, sharply in both directions. For investors to take full advantage of any opportunities, the best thing to do is to buy up the best companies (assets) during the Depths of Despair.

Money is made in the macro, but to pinpoint which companies are the “creme de la creme” it is important to do some research to figure out which stories are truly legitimate, and which ones are filled with nothing more than hot air.

In 2015, commodities across the board were getting pummeled — copper, lead, zinc, nickel, precious metals, etc…. It really didn’t matter what commodity you were looking at, nothing was spared! As the saying goes, when a sector is in liquidation, “the baby gets thrown out with the bathwater“…

One of my favorite investment ideas last year was Ivanhoe Mines (IVN.TO/IVPAF), a company that I continued to dollar cost average (DCA) into, month after month, especially when the share price showed especially strong signs of weakness. Most everybody in the mining business knew that Ivanhoe owned some of the world’s best assets (copper/platinum group metals/zinc), but when the macro is so bearishly negative, it really doesn’t matter…

Nobody gives a shit… The share price will just keep on declining… Fundamentals be damned.

But investors who want to exploit these “buying opportunities of a lifetime” really need to be paying attention to the underlying substance instead of fixating on the short-term price action movements…

Here is a 1-year chart of IVPAF to clearly show everyone what it was like to buy through the Depths of Despair.

IVPAF_chart

In the chart above, there are three arrows that show the correct course of action that anyone who was bullish on the future of commodities should have been undertaking.

One of the arrows shows the wrong course of action… I’ll let you figure out which one.

If I had to venture a guess, last year, I would say that 7/10 investors would have chosen to do NOTHING at all because when a stock chart shows such a negative downslope and trajectory, the fear of losing money becomes overwhelmingly paralyzing… No matter how great a company’s fundamentals are, almost nobody wants to catch falling knives. After all, if a stock has been going downhill for months on end without fail, that can only mean that the share price will keep on plummeting lower and lower and lower, eventually falling to $0, right?!?

Well, I would then guess that 3/10 investors would have actually had the stomach (and stones) to ignore such a brutal looking plot, and say, “Screw it, I’m going to jump into the fire, anyway!

The First Test

Of the 3 who were bold enough to venture into the game, I would then conclude that just 1/10 investors would have had the conviction and fortitude to not “Mission Abort” when the going got really, really, really tough… At the absolute bottom.

The nadir!

When everything looks most bleak, human instincts and psychology will almost force everyone’s hands into conceding to the path of least resistance — Selling.

Buy high and sell low…

We all want to do that… So bad!

But for the 1/10 who can invest without emotions and focus on the macro picture (fundamentals), they will make the real BIG MONEY with these ticking time bombs mining stocks by choosing not to sell into fear.

Half Way Home

If you are the 1/10 who managed to stay the course and continue holding your shares strong, congrats to you, you would have done well and won half the battle.

The other half?

The Second Test

Now you gotta practice that same type of discipline and again remain steadfast in your resolve to invest without emotions… At some point, these stocks will reach a “blow off top” phase, at which point, you must do the mirror opposite of what you had done previously — the second most difficult thing to do with investing… Selling High.

When everything looks most rosy, human instincts and psychology will almost force everyone’s hands into indulging in excess hubris (and don’t forget FOMO!), the path of least resistance — Holding (or buying more).

Buy high and try to sell higher…

We all want to do that… So bad!

But for the 1/10 who can invest without emotions and focus on the macro picture (fundamentals), they will make the real BIG MONEY with these ticking time bombs mining stocks by choosing to sell into greed.

 

And that’s how the mining game is played!

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{ 12 comments… read them below or add one }

1 Roadmap2RetireNo Gravatar August 30, 2016 at 8:11 am

We humans are weird creatures. We buy when we feel good and sell when we dont. If you can check your emotion and invert that behavior, you are golden 🙂

R2R

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2 FI FighterNo Gravatar August 30, 2016 at 4:07 pm

R2R,

You definitely got that right. It’s easier said than done, but immense fear is a time to buy and immense greed is a time to sell.

With mining stocks (outside of streaming and royalty companies), you really can’t treat them as Buy and Hold Forever investments. There is a time to buy, and a time to sell. To realize big gains in mining, you MUST SELL (eventually)!

And what better time to do so than when there’s pandemonium in the air? That’s what I’m holding out for…

Take care!

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3 ANo Gravatar August 30, 2016 at 8:51 am

I think we saw this same behavior during the recent recession as well. People were selling and did not buy during the bull run until it already had a good amount of gains. I just jumped into lithium as well and am ready to weather the irrational market.

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4 FI FighterNo Gravatar August 30, 2016 at 4:10 pm

A,

The article above was written using an example from last year, but what’s going on with lithium right now sort of mirrors the above.

Back in March-June, sentiment in lithium was at all-time highs and people were buying hand over fist. Since that time, the stocks of practically all the lithium companies have only been going downhill ever since. And with that, the pent up demand went away and there are fewer and fewer buyers to be found.

I’m not saying this is the bottom for lithium, but buying now is obviously a better entry point than back between March-June.

Certainly, it doesn’t feel that way… And that’s the reality with mining stocks…. Nobody ever knows when the sector will turn around and head the other direction!

That’s just how this game works…

Cheers!

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5 SGNo Gravatar August 30, 2016 at 12:53 pm

Late comer here. 🙁
Binge reading your blog posts.

If you were to start today, what would you invest in?

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6 FI FighterNo Gravatar August 30, 2016 at 4:14 pm

SG,

We are operating in interesting times right now. From the past posts, it’s probably very obvious that I’m not interested in real estate, index funds, or dividend growth stocks right now…

I do still like precious metals (on big dips like the recent pullbacks we have had) and the early-stage lithium juniors…

That’s basically it.

Of course, buying anything mining related isn’t as appealing today as it was back in 2015, but what’s done is done and we can only operate in the present now… There’s no point in looking back at price history, unless we are just trying to take a lesson and learn from it (the point of this article). And the key takeaway remains the same — buy when people are scared. This usually happens on significant pullbacks, regardless if we are in a bull or bear market.

Hope that helps.

Cheers!

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7 JanNo Gravatar August 30, 2016 at 3:39 pm

Good article.

How do you feel about GDXJ at today’s level? I don’t know if it’s low or high!
(I suspect it’s a decent price for the long term).

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8 FI FighterNo Gravatar August 30, 2016 at 4:19 pm

Jan,

As with the rest of the precious metals stocks, GDXJ has corrected a bit from the most recent high.

High or low? Honestly, I don’t think there’s any way possible for anyone to know for sure… We all wish we had a crystal ball but unfortunately no one does.

To buy anything, you have to ask yourself what your investment thesis is. If you are convinced precious metals will only head higher in the future, then an entry point after a significant pullback might seem prudent. If you aren’t convinced metal prices will rise much (or at all) in the future, then I’m sure any potential upside won’t look as appealing.

The reality is, nobody knows what comes next…

All I can say is that if I’m a buyer, I prefer purchasing on big pullbacks and when there is more fear than greed in the air… Chasing up has seldom (if ever) worked out well in my own investing career.

Hope that helps.

Take care!

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9 JanNo Gravatar August 30, 2016 at 5:26 pm

Thanks!
Sometimes ‘buy high, sell higher” works….but sometimes not!! 🙂

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10 SFtraderNo Gravatar August 30, 2016 at 7:14 pm

Hi Jay,

I enjoyed your interview with The Next Big Rush. Really insightful commentary regarding not being afraid to buy during a bear market when one sees deep value like (KCG), and holding conviction in your investments. I think that being gun shy is one of the hardest things to overcome, especially if one is investing in, as Rick Rule puts it, something that is “despised” (as I’m long Uranium and continuing to build a position). Now if Japan can only get those re-starts going…

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11 Rudy SMTNo Gravatar August 30, 2016 at 7:30 pm

Hi Jay,

sorry for my ignorance, but how Ivanhoe Mines Ltd makes money?

I looked at their income statements and there isn’t any revenue.

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12 JanNo Gravatar August 31, 2016 at 3:04 pm

Hi FiFighter – do you have any interest in the Oil/energy sector? Were you not tempted by the lows earlier this year?

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