Mining Stocks – Portfolio Performance (Non-GAAP Accounting)

by FI Fighter on September 24, 2016

in Lithium, Lithium Updates, Precious Metals, Precious Metals Updates

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A few posts ago, a reader of this site made a very insightful observation — He remarked (and I’m paraphrasing just slightly here):

 

“You embrace macro instead of micro investing, and I’m a believer in this myself but also I’m a believer to make investing easy. 

The Market Vectors Junior Gold Miners ETF (GDXJ” which hold some of your current holdings as well. The return of the index from the beginning of the year is about 117% and your current portfolio has done the same at 113%

What is the point to invest on the micro when you can just buy the index (macro) and enjoy the ride? One operation, $20 cost and it’s done. 

Am I missing out something?”

 

This was a most AWESOME comment, and quite frankly, I’m kind of surprised nobody else has brought this to my attention before. In case it wasn’t clear, I should first reply by saying, “Yes, I am indeed trying to beat the GDX and GDXJ indexes with my individual stock picks.

But let me backtrack a bit before I address the performance of my own mining portfolio year-to-date (YTD).

As I’ve witnessed and learned the hard way over the years, there is really no point in building up a portfolio of individual stocks unless your stated goal is to outperform the indexes… Once you tally up all the fees, commissions, expenses, etc., it just becomes exceedingly more difficult to outperform a passive low cost fund.

In other words, most people won’t be able to beat the indexes…

Seriously, this is one of the main reasons why I gave up on Dividend Growth Investing (DGI)… Sure, there’s no doubt that there are indeed investors who are sophisticated (and intelligent) enough to put in the time and research needed to outperform a low cost fund such as the Vanguard Dividend Appreciation ETF (VIG), or the Vanguard High Dividend Yield ETF (VYM) on a regular basis, but I found out first-hand that I was unable to accomplish such a task…

Point blank — I proudly admit that I was not good enough…

So, I gave it up entirely… and I will never attempt DGI again… But if I ever decide that I do want to saddle up and seek dividends, the next time around, I’m going to keep it simple and purchase an ETF/index fund (e.g. VIG, VYM, etc.) right from the start…

Also, I should share with readers that I’ve slowly realized that unless you are already in early FI and dependent on a reliable passive income stream, bottom line, it’s total returns (appreciation/capital gains + cash flow/dividends) that matter most.

I strongly feel that anyone attempting to get to early FI is bettered served to focus on total returns, first and foremost, above all else!

With that said, even as someone who is now in early FI, I still prefer total returns… Are you surprised? So knowing me, I’ll probably just stick to something like the Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), instead, if/when I ever get back into buying general equities again…

 

OK, with all that out of the way, let’s address my mining portfolio results…

 

The following may come as a shocker (or not) to you — When it comes to accounting, my results are inaccurate…

That’s right, a blatant lie…

Like all the big companies out there who are “manipulating” earnings/results, I’m no different… Just like the Big Boys, I also partake in “non-GAAP” accounting…

Who needs to use Generally Accepted Accounting Principles (GAAP) when you can use something so much more stylish like non-GAAP?

But before you get up in arms with what I’m doing and send me some hate mail, please let me explain…

Here’s what I mean by “non-GAAP”.

September 08, 2016. 1:10 AM (Tokyo time)

screen-shot-2016-09-24-at-4-43-50-pm

On September 08, just a little past midnight in Tokyo (and shortly after the markets in North America opened up for trading), I took a look at my mining portfolio and decided I wanted to swap out of a few positions…

As I described in this post and the subsequent one, quite simply, I stumbled upon some better ideas so I wanted to make some transactions…

What I did was the following:

  • Sold 2,934 shares of Tahoe Resources (TAHO) for ~$24,000 in realized gains
  • Sold 45,000 shares of Pilot Gold (PLG.TO) for ~C$24,700 realized gains

As you can see, by closing out those two positions, I booked some pretty substantial profits, relatively speaking…

But as usual (based off of what I’ve done so far in the past), once I exited out of a story altogether, I proceeded to wipe it off the books completely. What that means is that I don’t plug the profits back into the total cost basis…

Say, what?

Observe below.

September 09, 2016. 9:02 PM (Tokyo time)

screen-shot-2016-09-24-at-4-44-13-pm

What’s different between the two screen captures? In the second instance, I added shares to my Birimian Limited (BGS.AX) position, and I added an entirely new position in Alicanto Minerals (AQI.AX). Also, you should be able to see that shares of TAHO and PLG.TO are no longer anywhere to be found on the spreadsheet…

But check out my cost basis and total return numbers…

 

Total Cost Basis (Before): $378,707.96
Total Cost Basis (After): $421,015.64

 

Total Return (Before): 106.68%
Total Return (After): 87.96%

 

I hope that doesn’t make any sense to you… because it shouldn’t… No, I did not just somehow randomly stumble upon a ~$40,000 windfall (I wish)!

 

To add insult to injury, the portfolio value actually increased on September 09

 

Total Portfolio Value (Before): $782,710.44
Total Portfolio Value (After): $791,331.98

 

So, let’s get this straight… I sold off two positions, booked some decent profits, re-invested those proceeds, the overall portfolio increased in value… but my total cost basis went up and total return went down?

Yup, that’s my “non-GAAP” accounting for you…

Why is that?

Because I was being too conservative… Better to err on the side of caution?

My accounting was previously setup in such a way that if I sold shares of a stock that I already owned, I would re-input the profits back into the spreadsheet to reduce the cost basis (e.g. BTG, KLDX, TGZ.TO, etc.) on the individual stock position…

However, whenever I closed out a holding ENTIRELY, and used the profits to invest in a fresh, new position, or existing one, I didn’t re-input the profits back into the spreadsheet to offset the cost basis (e.g. using TAHO proceeds to add to my BGS.AX position did not offset the total cost basis or reduce the individual cost basis on BGS.AX shares at all… What looked to be happening was that the profits I was injecting appeared to be fresh new capital, from an accounting point-of-view. Now you know where that $40,000 “windfall” came from!)…

Anyway, what I should have been doing since the beginning of time was to keep tabs on all my realized gains/losses in the background so that I could input the net results into the ‘Total Cost Basis’ line to keep things inline, since like I mentioned above, I didn’t want to use any realized gains to offset the cost basis on any individual stock position (my preference is to let each stock position stand on its own two feet and begin the race at the starting line, without the benefit of a “head start” thanks to somebody else’s stellar performance).

In the past, this was never really an issue for me, though, because when gold mining stocks were in the toilet (2015), any “quick hit” gains that I made were so minuscule, they made almost no dent to the bottom line, anyway…

It didn’t matter…

But these days, yeah, when you are closing out positions and booking $20,000+ profits here and there, it will skew the total return significantly, as you can see above, if you don’t correctly account for the total cost basis…

So, long story short, yes, my accounting up to now has been entirely inaccurate and wrong…

Let’s try and fix that now…

I actually went through my transaction history and re-calculated the total cost basis with all the short-term gains that I’ve booked on all the mining stocks that I’ve sold so far…

Here is the “new and improved” portfolio, using “GAAP”.

September 24, 2016. 5:39 PM (Kyoto time)

screen-shot-2016-09-24-at-5-39-47-pm

 

There it is — My total cost basis is actually $357,378.52.

 

Total Return: 124.37%

 

Back to the question about trying to beat the GDX/GDXJ?

 

Here’s how those two gold mining ETFs have performed over the last year (I started compiling my mining portfolio roughly 1 full year ago)…

gdxj_gdx_chart

  • GDX is up 103.8%
  • GDXJ is up 132.1%

 

Over the last full year, my portfolio is underperforming the GDXJ…

 

And that’s just fine by me…

 

To be fair, a direct comparison between my portfolio and the indexes can’t really be made… The GDX and GDXJ are precious metals mining ETFs…

My portfolio is a mix of precious metals, base metals, and a whole lot of lithium… and a trace amount of graphite…

To perform a more “accurate” apples-to-apples comparison, I would have to strip out the non-precious metals stocks:

  • Critical Elements (CRECF/CRE.V)
  • Ivanhoe Mines (IVPAF)
  • Altura Mining (AJM.AX)
  • Birimian Limited (BGS.AX)
  • Pilbara Minerals (PLS.AX)
  • Volt Resources (VRC.AX)

No doubt, my performance would look a whole lot better without including some of those names… Check out my worst performers to date, and you’ll know what I mean…

Anyway, here’s what things look like if I wipe off all the base metal/lithium/graphite stocks from my portfolio… And to make life less complicated, I even stripped out all realized gains made from my short-term trades to give a more “direct comparison” to the major indexes…

Here it is for you readers, just for kicks.

September 24, 2016. 6:03 PM (Kyoto time)

screen-shot-2016-09-24-at-6-03-46-pm

If we are just keeping the conversation confined to gold/silver (although some might argue that BGS.AX is sort of a hybrid gold/lithium stock!), my performance is somewhere in the total return range of 166.90%.

Whatever…

Honestly, I really don’t care… We are probably only entering into the top of the 3rd inning of a 9 inning ballgame… There’s still a lot to unfold from here and it’s way too early to already assume we know who will emerge victorious… But around the 6th or 7th inning, the results and comparisons will matter because I’m not one of those stud pitchers who can deliver a complete game… Nope, better call in the bullpen at that juncture because I will have checked out and be making my way to the locker room well in advance of the dust settling…

Readers should know full well by now, I am most allergic to froth and bubbles…

Anyway, even if I was getting obliterated out of the water by the GDX/GDXJ, right now, I still wouldn’t have any interest in converting my entire portfolio over into an index fund…

Yes, if I was underperforming convincingly, I would probably transfer 80% of my portfolio, but I’d still want to set aside maybe 20% (or more) for speculation on early-stage exploration stories…

Right now, I’m extremely bullish on BGS.AX and AQI.AX… Purchasing an index fund would NOT allow me the opportunity to participate in ideas that I think will drastically outperform most everything else from this point moving forward (although those stories are way, way, way riskier than the ETFs!)…

Moreover, as I had previously mentioned last week, my preference at this time is to invest more heavily into sub $100 million market cap gold/silver stories… Where things stand now, I just think there’s a ton more value (alpha) to be extracted in that space; in my eyes, the seniors, mid-tiers, development-stage stories, royalty and streaming companies, etc., have all been bid up to fair/over value…

Again, an index fund just doesn’t give you that type of flexibility! With the GDX/GDXJ, you HAVE TO buy up everything (the good, the bad, and the ugly)…

 

 

But yes, no doubt, at the end of the day, the goal is to beat the index funds!

 

Anyone who is hand-crafting their own individual portfolio and can’t admit to that is deceiving both you and themselves…

 

With dividend growth stocks, I know for a fact that it’s impossible for me to beat the markets (I learned the hard way first-hand)… With mining stocks, stubborn (and naive) as I am, I actually am dumb enough to be convinced that by the time I finally liquidate out of my entire portfolio completely, I will have beaten the indexes in total return…

 

OK, now you can get up in arms over my stupidity!

 

Anyway, at this stage of the game, I’m starting to debate whether or not I should just stop posting my results/returns altogether… Quite frankly, I think by now everyone knows that precious metals (and their mining stocks) are at the start of the next bull cycle… By posting these numbers, I sort of feel like I’m doing more harm than good…

 

People get the picture…

 

Just like with my net worth/cash flow reports, it’s probably about time I just let these numbers fade into black…

 

Fight On!

 

Please note: In this article, I made reference to both GAAP and non-GAAP accounting… I did so ONLY for fun and in the spirit of joking! I am NOT a certified accountant! My accounting is simply my own style of accounting for my own personal use to keep tabs on unofficial performance and it has absolutely nothing to do with tax reporting!!! Please do not be confused and I hope you do not misinterpret anything that I am trying to say…

 

{ 5 comments… read them below or add one }

1 kiwisparkyNo Gravatar September 25, 2016 at 4:01 am

Hi fifighter

Just wondering about your thoughts on Kidman Resources (KDR). I hold almost the same Lithium and Graphite companies as you. However i also have a large percentage of my funds in Kidman, is there any reason you have not invested in them?

Reply

2 FI FighterNo Gravatar September 25, 2016 at 4:14 am

kiwisparky,

Congrats on the big gains on KDR so far! The recent share price performance has been absolutely incredible.

With KDR, I simply missed out on it as my attention and focus was almost entirely on Birimian at the time. Birimian, I was initially more comfortable with b/c of the previous bulk sampling that was done that showed high grade spodumene concentrate + good recoveries. Plus, KDR seemed to be drilling at greater depths, and I wasn’t sure if this would involve a more costly underground type of deposit (the cost of doing business/expenses in Mali with Birimian should be more favorable as well, compared to KDR and Australia)… In hindsight, I should have kept better tabs on the KDR story…

Kidman does has massive size and grade scale potential, plus 1M oz of gold, so they’ve got a lot going for them. Maybe we are looking at the next PLS? And they are in Australia too, a much more favorable jurisdiction than Mali (from the POV of most investors’ eyes which should help it maintain a good premium). I guess the only real concerns at this point is we need more drilling to confirm size, grade, metallurgy, recoveries, etc… No different for BGS and any other early-stage exploration story.

I hope KDR does well, but at these levels, I feel like I’m probably too late to jump onboard now… I’m positioned in Birimian, so hopefully both companies will continue their upward ascents.

All the best!

Reply

3 kiwisparkyNo Gravatar September 25, 2016 at 5:58 am

Thanks for the quick and thorough reply, really appreciate it.

Reply

4 FI FighterNo Gravatar September 25, 2016 at 1:40 pm

You bet!

Reply

5 Rudy SMTNo Gravatar September 26, 2016 at 3:52 am

Thanks for the update.

Well, sometimes accounting have to be refined.

I just change my net worth accounting system to the GOLD STANDARD to make more sense over an extended period of time.

There is no point to use FIAT currencies which by their nature are design to lose value over the years.

I would love to hear your thoughts on my last post blog over to SMT as you’re a believer in gold, and if it makes sense at all.

Reply

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