When it comes to mining stocks, there probably isn’t a more, stereotyped, hated, and misunderstood asset class out there… For whatever reason, people just love to rip on these poor stocks… And even when they are down and out for the count, folks will still feel the need to throw in an extra kick or two…
Well, that’s too damn bad… for the closed-minded individual. Because the truth of the matter is — Just like with any other investment/asset class/sector out there, you can make a shit ton of money in mining stocks… if you learn how to play the game right.
Mining stocks are no different than: general equities, dividend growth stocks, real estate, etc… They just happen to be a million times more volatile… But as is so often the case with making money, any sharp fluctuations in price should be seen as a good thing; volatility provides you, the patient (and educated) investor, the perfect window of opportunity to capitalize on the immense fear and extreme greed.
Investing ALWAYS comes down to this:
“Buy low and sell high.”
The most basic and important rule of them all!
And the above axiom will be the foundation of this article, which will focus on the investor mindset/psychology and how understanding it can help someone make substantial gains trading mining stocks.
Buy and Hold… Rentals
Unfortunately, when it comes to investing, 99% (or more) of all investors out there have been brainwashed into believing that Buy and Hold Forever is the only suitable and proven strategy that can work. In other words, people are just so conditioned into evaluating investments in a certain light that they will try and apply the same techniques and methods to ALL asset classes.
The lazy investor will thus try to do this with mining stocks, pulling up a 5-10 year chart on any mid-size/large cap stock, and naturally concluding that the investment class (as a whole) sucks major azz…
Let’s use B2Gold (BTG) as an example.
Here’s the 5 year chart on BTG.
At first glance, a typical investor (who doesn’t understand mining stocks at all), will simply conclude:
“Holy smokes! BTG is down -21.8% over a 5 year stretch! Yup, no doubt mining stocks are a crappy investment because had I gotten in and held shares all those years, I would still be down on my initial investment! Oh and here’s the worst part — Most mining companies don’t even pay a nice, shiny dividend!
Screw mining stocks!
What a lousy, terrible investment… I’d be better off just flying out to Las Vegas and betting all my chips on black!“
Boy, oh boy… If I had $0.05 for every single time I’ve heard that type of spiel!
But like I always preach on this blog, you’ve got to approach investing (and life) with an open mind! In this case, the beloved Buy and Hold Forever model crumbles apart and doesn’t work at all for BTG (or basically the majority of mining stocks)…
Stop trying to force-fit a square peg into a round hole!
I repeat — Buy and Hold Forever doesn’t work for mining stocks at all… But what about Buy and Hold… Rentals? In other words, don’t make a lifelong commitment to these investments (they will never love you back or keep you warm at night like a good spouse), but instead treat them as disposable razorblades… You know, once the task at hand is complete, you discard them…
Plugging in the new model of Buy and Hold Rentals, let’s re-examine the BTG stock example, and let’s also never, ever, ever forget the important axiom of:
“Buy low and sell high.”
Never forget the first rule of
Fight Club Investing!
Wow! Well, don’t those results look a whole lot better than before! BTG is up 282% in the span of just one year!
Anyone who doesn’t think those type of gains are significant and can help a person turbocharge their progress towards early FI is delusional…
I’ll take those gains any day of the week!
Anyway, this is just one basic example, but readers should CLEARLY be able to see how the use of different models can lead you into forming a different kind of conclusion… In the case of mining stocks, investors would probably be a lot better off if they just stuck to the Buy and Hold Rentals model.
My own personal belief is that unless the mining stock I’m buying is in fact a world class royalty and streaming company (e.g. Franco-Nevada; FNV), I have ZERO interest in setting it and forgetting it. With Buy and Hold Rentals you monitor this type of investment like crazy (once a week preferably, or at the minimum at least once a month)!
Timing the Market
The next most popular belief among the masses out there is the whole notion that you can’t time the market, so you shouldn’t even bother trying… If you do, you’ll be sorry! In fact, it’ll be the biggest mistake of your life! 😉 *SARCASM*
Better yet, just close your eyes and blindly do what everybody else is doing (especially follow the “financial experts”, or “gurus” who’ve always got your back and best interest at heart!), even if the facts (data) show that without a shadow of a doubt that the popular “flavor of the week” assets these folks are all recommending you buy are trading at historically
high absurd valuations… *SARCASM*
“Because in the long run, you can only make money following the herd… so don’t you worry about it!” *SARCASM*
And because the dogma states that you can’t time the market, of course these “authority figures” in finance are going to shit on mining stocks… When we’re talking about commodities/minerals and the mining sector, all they ever do is boom and bust… over and over again, without fail!!
Or even better, here’s the HUI/Gold ratio…
From Macro Trends:
So, seriously, with historical evidence such as the above charts are showing, how can you in your right mind tell me NOT to try and time the market?!?
What the uninformed haters are really trying to tell you to do is not to play the sector at all… Yup, again it’s all gambling, so you might as well just book that trip to Vegas already and try your luck there… *SARCASM*
But what do I see?
A ton of it…
When assets (that hold REAL tangible value) are selling of for pennies on the dollar (thanks Mr. Market!), you don’t sit around waiting for someone else (e.g. friends, family, co-workers, mainstream media, etc.) to tell you to take action (that will NEVER happen!)… No, instead you jump into the fray with both feet and make sure to back up as many trucks as you can! We all know that certain commodities (e.g. gold, silver, copper, nickel, lead, zinc, etc.) won’t be going obsolete and the way of the dodo bird anytime soon (these basic materials are all needed to make the world go round), so whenever the corresponding mining stocks are all selling off and operating in deep liquidation space, realize that a prime window of opportunity to make a fortune is within your grasp.
No, I’m absolutely NOT that smart or talented at all… and nor do I need to be in order to play mining stocks; I just have to understand the fucking rules. And again, mining stocks are extremely volatile! Beyond belief, off-the-charts volatile!
“Buy low and sell high.”
I cannot repeat that enough times… If that simple statement is not yet embedded within the very fabric of your being, you shouldn’t waste your time and even bother attempting to trade mining stocks…
No, you don’t have to nail the timing 100%… Nobody can… It’s an impossibility… But as the BTG example showed above, you don’t even need the exact peak or trough to make out like a bandit! Just get the timing near enough where you are CLEARLY buying closer to the bottom than the top, and sell out when you’re obviously well above your initial entry point (and you’re sitting on some sizable gains!)…
This shit ain’t rocket science!
But unless you “time the market“, “buy low and sell high“, and use these mining stocks as Buy and Hold Rentals to make you filthy rich, you will get slaughtered playing this game!
Macro Trends – Check Your Ego At the Door
Mining is not only an extremely unstable and unreliable industry (we ain’t talking about selling toothpaste here!), but it relies on macro trends perhaps more than any other sector out there.
Why is that?
Quite frankly, it’s because mining stocks provide inherent built-in leverage to whatever commodity you’re investing in (e.g. gold, silver, copper, zinc, lithium, cobalt, etc.)… So, if the commodity goes up or down even slightly (say 1-2%), you can expect these shares to respond violently (5-10% or more) in return.
That’s just how leverage works… It cuts sharply in both directions! At the bottom of the barrel, leverage is an investor’s dearest and most supportive companion! At the top of the mountain, leverage ain’t leverage anymore… It’s so toxic to your well being, it’s better referred to as debt… and it will ruin you! So you better use it wisely.
“Buy low and sell high.”
It ALWAYS comes back to that!
And those important words of wisdom help connect us to the macro trends. Yes, on the day-to-day, when we are building up our own portfolio in these mining shares we are relying on the micro, but when we step back and analyze the bigger picture, everything ALWAYS reverts back to the macro!
From Macro Trends.
And being able to analyze a macro chart like the one above takes nothing more than an elementary school level education…
Believe me, I assure you that I’m not trivializing matters…
It’s really that simple!
You don’t need no damn calculus to understand that ALL asset classes move up and down with time, oscillating like sine waves. I’m telling you to just look at the peaks and valleys, not compute the area underneath the curve… 😉
So, although this might all seem too basic and easy, there’s nothing more to it than that! Investors who try to take such a rudimentary concept and turn it into something all fancy and complicated are not doing you, themselves, or anyone else any favors…
When it comes down to it, I think most people just have too much damn pride and ego… On the daily, we’re always trying to outsmart and outfox the markets… We need to pat ourselves on the back and constantly reassure ourselves that we are such freekin’ investing geniuses…
But to make money in mining stocks, bottom line, you just need the macro trend to support your thesis…
As the saying goes:
“A rising tide lifts all boats.”
When a commodity, such as gold, is rocketing up say 10% in a year, or rising from $1,080/oz to $1,350/oz like it did in 2016, ANYTHING you own that has the word “GOLD” on the share certificate is going to go hyperbolic… Even the crappiest companies in the sector who don’t have a snowball’s chance in hell of ever putting a mine into commercial production…
That’s just how the game works…
Yes, no doubt it’s important to do our best to pick out the companies and stocks that we think will benefit the most with rising metals prices, but never forget, this game is ultimately won and lost in the macro, not the micro.
If the prevaling sentiment towards the mining sector is excruciatingly negative (like it was from 2011-2015), you can have instances where a company who controls world class assets like Ivanhoe Mines (IVN.TO/IVPAF) does trading for roughly the cash they have in the bank (or even more drastic, at NEGATIVE enterprise values)… Yes, at the bottom of the cycle when everyone thinks mining stocks are at their riskiest point (in reality it’s actually the exact opposite!), even the “best of the best” in the business will go down like the Titanic…
But when the tide finally turns… You can experience majestic 638% gains such as this…
Please keep in mind — Macro trends never develop and unfold in the timeframe that is ideal for us… EVER! It could take: 3, 4, 5 years (or longer!) for your investment thesis to work out… You have to be cognizant of the fact that the performance of these mining shares will ultimately rest on the equilibrium between supply vs. demand for the underlying commodity. To make the big time gains, you’re going to need demand to overwhelm supply, ideally in both the real sense (actual physical supply) and from the sentiment (market/investor expectations) side of things…
Patience is key! Lack of patience and the insistent demand for instant gratification greatly explains why the majority of investors in mining stocks don’t make the significant profits they are after when they first elect to play.
Never forget or underestimate the importance of the macro picture!
You Will Swing and Miss… Often
I often like to say that to succeed with mining stocks, an investor/speculator has to take on the mindset of a professional baseball hitter… Just like no player (even if they’re a perennial All-Star on their way to the Hall of Fame) can ever get on base every single time that they step inside the batter’s box, no one who has played in the mining sector long enough can go unscathed…
Failures, diasters, strike outs, big losses, mistakes, deep regret, etc… are all bound to happen sooner or later… I don’t care if you’re buying: producers, developers, early-stage explorers, prospect generators, etc… Mining is an impossible task (business) to get right 100% of the time for all parties involved… That’s just the cold-hard reality of the situation…
As investors/speculators, we are better off just accepting that universal truth up front — We will lose some money along the way.
Of course, that doesn’t mean you still can’t make some serious coin on the whole, as an aggregate… No, all that means is that you’re going to incur some bumps on the road as you navigate your way to victory…
Just accept the losses, and don’t sweat the technique!
Here’s just my own example of mining stock failures in the last ~1.5 years or so…
I made a speculation on Northern Shield Resources (NRN.V), an early-stage exploration company that I thought had good chances of really delivering the goods and making a significant discovery up in the Labrador Trough, in Canada.
So far, I’ve been proven dead wrong!
To date, I’m down -70% on my position, and about -$8,500 USD.
To put it in context, yes, I did take a bit of a gamble putting capital at risk on a spec company that had no defined mineral resource of any kind, and were drilling blind targets based off of science more than anything else…
Of course, investors/speculators can try and better insulate themselves from such risks by focusing on more proven companies that have very well known/defined mineral resources/reserves in place that have been demonstrated economical, whether by advanced studies (e.g. Definitive Feasibility Study; DFS), or are actually in commercial production…
But even going down that route, there are no guarantees either… Just look at the recent debacle at New Gold (NGD), a “proven” producer, for example…
In fact, in my two years of trading miners, here are my biggest losers summed up for you below…
My Biggest Losers List:
- *Northern Shield Resources (NRN.V); -$8,490.89
- Volt Resources (VRC.AX); -$6,390.46
- Copper Mountain (CPPMF); -$4,007.43
- Altura Mining (AJM.AX); -$2,215.78
- Energy Fuels (UUUU); -$1,665.19
That’s well over -$20,000 in losses, most of it realized!
Well, first off, if you are uber-conservative, then mining stocks definitely aren’t suited for you! But if you’re gonna play, well, again check your ego at the door and realize right off the bat that you will make some poor decisions and end up losing money in the process… It happens to EVERYONE I know who has traded mining stocks for any duration of time (and is being perfectly honest about their results)…
However, you shouldn’t let some bad fortune/luck stop you dead in your tracks! Otherwise, you might miss out on some massive gains that will more than amortize your losing bets…
You win some, you lose some…
With that said, if you try and execute the following/similar type of risk vs. reward strategy with each one of your mining stock buys, you should (over time) make a lot more dough than you lose… That’s the key, after all…
Here is my own favorite “waiting for a fat pitch” investment strategy, which is often made possible when these mining stocks are being sold off by the market and descend into deep value territory:
- Risking 50% of your principal to chase after undervalued assets that could realistically and conceivably return 500% gains in the future is a winning proposition!
On the flipside:
- Risking 20-30% of your principal to chase after overpriced assets that could realistically and conceivably return no more than 5-10% gains in the future is a losing proposition!
As always, the key to executing successfully in this game rests on the fundamental principle of, “buy low and sell high.”
Maintaining the proper discipline will help ensure that when the dust is settled and all is said and done:
As a whole, your wins will be far more staggering than your losses…
Translation — By the time you decide you are done playing mining stocks and want to walk away for good, you will have made a handsome fortune.
During the process of trying to “strike it rich”, by far the biggest common mistake I see investors/speculators make is this — They hold on to their lemons for far too long!
Here’s a strategy amateurs like to use, and it’s a terrible one at that:
“I’m going to sell my shares once the stock recovers and I break even again…”
Terrible… Absolutely terrible…
Like in my Volt Resources (VRC.AX) example, once the losses have occurred, the past is the past, and it should have no bearing on any investment decisions that I make moving forward…
The better question to ask yourself is this:
“If I was starting out today with $X, would I still purchase the same stock?”
In the case of Volt Resources, I asked myself that very question and my response was a resounding, “No!”
So, I cut my losses, liquidated my shares, and re-invested the remaining capital (whatever I could salvage from the train wreck) elsewhere… No need to hold on to “dead weight”, or “trapped” capital…
If you take the amateur route, you will be inflicting a double whammy on your portfolio without even realizing it:
While you are waiting endlessly for a turnaround story to occur (which may never even happen), you risk missing out on the next big thing…
“There’s ALWAYS another train arriving at the station.”
Never fall in love with a stock! It’s purely a business decision you should be making…
And right now, I’m asking myself that same very question as it pertains to Northern Shield Resources… Yes, I lost a shit ton of money on that speculation, but it’s not the end of the world…
Human Psychology 101 for you:
“Losing $1 will elicit a much stronger emotional response than making $5.”
So, don’t let your irrational and illogical emotions get the best of you.
Although I haven’t made the move yet, my inclination is to sever ties with my NRN.V shares (the last round of drilling has altered my original investment thesis and right now I’m nowhere near as optimistic about the odds of a massive discovery being made) and to redeploy the funds elsewhere…
No doubt, we would all LOVE to generate a base hit with every mining stock we invest/speculate in, but really, the odds of that happening with each and every new purchase we make are quite low (if not ZERO)… I hate to break it to you, but not even baseball’s greatest legends: Ted Williams, Tony Gwynn, Willie Mays, Bath Ruth, Hank Aaron, etc. ever batted 1.000 in a season.
Not even close… And they are all most deservingly in the Hall of Fame!
So, don’t lose focus on the BIG picture! Again, losing trades are just part of the process and the nature of the beast…
Sell your losers and move on to something bigger and better!
Resist Chasing Hype
Here we go again, “buy low and sell high.” I can’t get enough of that statement, apparently. But here’s another instructive lesson I learned last year during Lithium Boom 1.0… When a commodity is being pumped up and hyped to the MAX, you better be cautious as hell if you’re just getting interested in the sector for the first time… Chances are, the “pumpers” were all early entrants into the stock and are now working overtime to sucker you into overpaying…
Here are some sad examples of momentum chasing on the ASX from 2016.
Lots of investors/speculators were burned with these stocks… Many taking extremely bad advice offered by the stock “pumpers” found on message boards and following the hype… into oblivion…
Ignore the hype and focus on the fundamentals! Hype chasing ONLY works if the company you’re targeting actually has the goods to support the rapidly advancing share price (market cap) re-rating it’s receiving from the market.
But anytime you are buying into strength, you have got to be extra careful and mindful of any sharp pullbacks (e.g. profit taking, short selling, momentum/euphoria fading, etc.) that may suddenly occur after your purchase! When in doubt, stick to “buy low and sell high.”
Buy when nobody else gives a shit…
…So that you can sell when everyone finally does!
But in the instances where you actually do miss out on a truly prospective story that ends up multi-bagging and making its investors billions of dollars in the process, so what?
Again, it’s so important to remember:
“There’s ALWAYS another train arriving at the station.”
You can’t win em’ all… And you don’t need to in order to achieve great success in the mining game.
Taking “Free Rides” and Reducing Risks
Did I mention that mining stocks are extremely volatile? In fact, they spike so often that you should ALWAYS expect for ANY stock that goes up in a straight line to come crashing back down again… at some point.
Yes, even the best companies with the most excellent fundamentals who are routinely hitting (exceeding) milestones are not immune to selloffs… Players are gonna play, and traders are gonna trade…
So, what can you do to benefit from all this day-to-day micro action? Well, if you want to reduce your risks, the easiest thing you can do is to employ the strategy of:
“Selling half of your position on the first double.”
By doing so, you effectively reduce your cost basis to $0, have NO skin the game, and yet you still hold shares in the company you’re investing in and can fully participate in any upside gains. In other words, you can now just sit back and enjoy the ride without having to stress over losing your initial investment capital… It has all been returned back to you when you sell on a double!
Do 100% gains seem far-fetched and unrealistic to you? If they do, you’re probably buying way too high! Really, mining stocks are so crazy volatile, that one should ALWAYS expect to eventually come across the situation where they must make the decision whether to hold onto their core position, or to indeed sell half on a double…
If you want the MASSIVE gains, perhaps you don’t need to sell half, but at some point, I don’t think it’s ever a bad idea to take at least some chips off the table… Any good chance you get to reduce your cost basis, I say take it…
For myself, I have done this many times before in the past with my own holdings (e.g. Klondex Mines; KLDX, B2Gold; BTG, Alexco Resource; AXU, etc…).
Chances are extremely high that again, what goes up will at some point come crashing back down again… Unlike most other sectors, mining stocks can go up 100%, and then fall -50% for no good reason at all… No bad news, no major changes, NOTHING…
Just sentiment and the macro forces at work…
To sum it up — Mining is a very volatile and risky game… Take some big profits off the table and significantly reduce your risk exposure whenever you can!
Understanding Fear vs. Greed
“Buy low and sell high.”
“Fear vs. Greed.”
The most difficult thing you can do with mining stocks is to buy low… When these stocks are cheap, they become massively undervalued and are trading in deep value territory.
Nobody wants to touch them with a 1,000 ft. pole.
You will feel like the biggest idiot in the world when you are indeed buying low.
From January 19, 2016.
As for the second most difficult thing you can do when it comes to mining stocks?
Selling into greed and booking profits is NEVER a bad idea… But it will sting like hell, especially if you do so and watch the stock climb up even higher, beyond your wildest dreams and expectations…
That scenario beats the alternative — You ride your stock all the way up to uncharted heights, sit on a multi-bagger hoping it goes even higher and higher… only to then watch it come crashing all the way back down… finally walking away with… no gains… NOTHING!
“Buy low and sell high.”
You’ll NEVER be able to perfectly pick out the tops and bottoms… Just follow the sentiment of the herd, and do the exact opposite to what they are doing.
“When the ducks are quacking, feed them.”
Don’t be the bagholder… Instead, be on the opposite side of that trade. 🙂
When you want to learn how to do anything in life, you’ve got to study up and learn the Rules of the Game… Mining stocks are no different… Sure, the industry and stocks are quite a bit more volatile than your typical equities, but it is what it is… You can still make a lot of money in this space, but the most important thing is that you approach it with an open mind… Eat some humble pie, and never go into anything presuming you know everything…
In my own case, I’ve learned quite a bit over these last 2 years or so playing the mining game, but I still don’t know jack shit about anything (I’m just your typical retail investor who has no real, significant connections inside the mining industry!)… I’m still very much an amateur and learning as I go… Yes, I’ve made a ton of mistakes in the process (just check out how much $$$ I’ve lost with my picks), but with each loss, I take a step back and try to analyze where I went wrong (I’ll save those details for another article)…
All in all, despite all the obstacles and challenges, I’ve still found that mining stocks can be extremely lucrative for investors… And like I’ve said throughout the article, ultimately, everything comes down to the macro, which is the most important thing of them all.
So, what’s the macro summary here?
That’s what it comes down to… And in 2015 (buy low), 2016 (both buy low and sell high opportunities aplenty), and perhaps 2017?, mining stocks have been a wonderful vehicle that have helped many get closer to (or achieve) that wonderful end game.
Early FI — That’s what it’s all about!
I’ve never lost sight of that…
In the summer of 2015, I saw a wonderful opportunity to make a shit ton of money in mining stocks… So, I swallowed my pride, hit the books, networked with those who actually knew what they were doing, and to this day, I continue learning the Rules of the Game.
And believe me when I say — It’s been totally worth all that time and effort!