Comment DENVER, CO -- Since the beginning of 2006 we have seen an exciting up move and a corresponding correction. The shift in portfolio value for most resource stock investors was enormous as the market hit its peak and then corrected severely a few months later.
Each and every time we go through such a cycle, investors should take inventory of both the good and bad decisions they made during the cycle and learn from them.
Below I have listed some of the mistakes I have seen investors make so that in the next cycle they don't repeat these same blunders.
Number 1:
One of the most common mistakes I see people make over and over, cycle after cycle is not taking some profits in high-performing stocks when the market is hot. Anytime a stock moves up two, three, or even four fold or more within a short period of time, it is always prudent to take 25% to 50% off the table.
Personally, in such situations, I like to at least get my original investment back and play with the casino's money so to speak with the balance of the shares.
By paying my original investment back, I can use that cash for the next down cycle where I can buy near the bottom, and have less worry and risk with the balance of the shares that remain.
While this sounds easy to do in concept, it is very difficult to do in real life. Most investors get caught up in the euphoria of the moment when the market is hot and instead of selling some stock, they start buying more.
This typically proves to be the wrong time to buy and oftentimes causes temporary losses until the market rebounds from a correction, if it rebounds at all.
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If you sell some stock, use the profits to do three things:
A. Pay down/payoff debt
B. Buy physical precious metals (bullion coins and bars, not numismatic coins)
C. Re-load into some other low priced junior stocks when the market corrects.
If you sell when the market is hot, you will have some cash to buy good value when the market corrects. I often hear people say they have no more money to invest because they didn't sell some of their high performance stocks when they were at much higher levels.
Statistics show that if you could buy within 20% of the bottom and sell within 20% of a top, you would be in the top 5% of investors who are successful at speculating in any market.
If you understand the cyclical nature of these resource stocks, then you know that you need to take money off the table when the market goes our way. Remember to cash in and put some money aside the next time the market takes off.
As an example of this, I originally recommended Silvercorp (SVM) around the $1.50 level. Ten months later the stock was trading at $20.00. I started to tell people to sell 25% to 50% around the $16.00 level after such an incredible up move.
Very few listened.
The stock retracted two months later to $10 and now is trading sideways at the $13.00 level. In other words, the stock corrected from $20 to $10 in a matter of a few short weeks.
Number 2:
Buy quality companies that have some existing asset in addition to some exploration activity. When I see the great value that is before us in many of the mining stocks right now, I prioritize them with the companies that have some existing asset near the top of the list.
These companies typically will be the quickest to rebound when the market heats up again and offer us less risk then some who simply represent exploration activity. No matter how great the story sounds, a bird in the hand is better than one in the bush as the saying goes.
When buying stocks in a correction make sure you are getting true value. What does the company actually have? Are they getting ready to be a near-term producer? Have there been any significant developments either positive or negative since the market has corrected that could affect our share price? These are just some of the questions that you need to ask yourself before picking up stocks at bargain basement levels.
In other words, try to find the best bargains.
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A simple way of doing this is to look for the biggest spreads from high to low in our stocks as they corrected. As you find those companies, do your own due diligence to make sure you understand what caused those moves and why. Was it just the market correction or was their something else as well.
Number 3:
Don't hang on to losers. If you made a mistake, cut your losses and move on. Even successful investors have to prune their portfolios from time to time and remove the tares from the wheat.
Number 4:
Don't get greedy. Remember if you are making great profits of 2X or more with a short-term investment you are outperforming most of the investing public and are in a very elect group of individuals. Our greed can sometimes be our shortcoming in these markets. Take money off the table when you can.
These are just a few of the many lessons we need to learn as we invest in the resource sector.
Here's hoping we are all more profitable in the next cycle, which I feel is getting very close. Stay tuned, the volatility to the upside will be even greater this cycle than the last cycle!
And remember to take some profits!
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