The following represents the Author’s views only. All readers should consider their own situation individually and take appropriate investment advice where relevant.
I have been investing in natural resource junior stocks for about 13 years and investing generally for over 30 years. I came to the natural resource sector at a time in my life when I needed to find a way to make money faster than could be achieved through the slow grind of everyday work as an employee working for others.
2005 to 2006 was a pretty good period, and my first exposure to what the natural resource sector could give in terms of rapid returns. Up 50% in less than a year.
2006 to 2008 was another lesson, this time in terms of what the sector could take away, also in a relatively short time period. Down 75% in around 2 years.
With 2008 came the Lehman debacles and Global Financial Crisis of course, which caused a capitulation driven collapse and crunch of listed company valuations all over.
Christmas 2008 was time for a review. On a personal and financial front, things were not great and more than ever I needed to find something that could deliver really outsized returns quickly.
I thought about it and realised I didn’t actually know too much about many things, other than being an employee (Forensic Accounting mainly in my career) and investing. The former was possible but not for me a draw and certainly a slower grind to where I wanted to be. The investing route though had potential and I felt if I applied my accumulated experience I stood a chance.
In preparation from 26.12.08 to 1.1.09 I studied three things. Firstly, a book on managing trading emotions. Secondly, articles on investing (from which I learnt – at last – that you buy the stuff that is hated). And thirdly, the opportunities available in the London stock market and AIM in particular.
I had one “aim” – to find the most hated, despised and therefore undervalued sector. Natural resource juniors were clearly in that category. I focused on natural resource investing along with a few forays into small cap biotechs and a few occasional others.
2009 -2011 the net result all in was a 2.5-year run that saw my portfolio increase 150 or so times. (Don’t worry it started from a low base.)
2011 – 2014 ouch down again with a 75% loss on paper.
2014 – 2017 overall up around 20 times
2019 so far, down around 50% on paper.
It’s a roller coaster, but one point to note is that at the most acute points of frustration, worry, unhappiness etc, there was something quite amazing about to happen. Fortunately, historically at these times I held on just as I am doing today after the challenges of 2018.
If I had pulled out all my capital in mid-2014 I would have missed the 25x uplift that was impending (10x within a few months as the recoveries tend to be fast and furious).
Same for December 2008, when I would have lost that life changing 150x return.
If you are a reasonably engaged investor having experienced a poor 2018, like most junior resource company investors have, you will currently have a high level of fear and an overwhelming urge to protect capital. These things are good to keep you in check sometimes but often frightfully damaging if you want to make the right investment decisions.
Right now you look at your positions and compared to months, weeks or even days ago you will likely see red. You may browse the discussion boards (not that most people with any money spend too much time on or around them anymore) and twitter and see a diatribe of abuse for holders of stocks.
Of course, much of what you read is not to be trusted. Many market participants on the short side (and there will likely me many in the junior resource space at the moment) use social media to spread scare mongering and get you to sell shares at times like this.
Your husband, wife, sister, brother, aunty, uncle, friend, son, daughter, neighbour, work colleague or whoever you discuss share trading with will not be too engaged or sympathetic to your losses. In this game you are a daft sod when shares are falling and a lucky bugger when they are rising.
There will be an overwhelming urge to blame the market and sentiment generally for your losses and there is a tendency to search for reasons why the companies in which you invested have failed to deliver.
How the newsflow has been poor – fair criticism often as companies can be extremely poor at newsflow management.
How the companies should be more active – yeah maybe but what with – if finance is tight companies must be cautious and at times like this operational news hardly makes a dent on the share price (although regular news does increase market awareness of a stock ready for the next upswing, so is still important).
Perhaps how the overpaid management have just been creaming it and how they should buy more shares to show they are aligned – err no why should they, directors can’t sell stock they buy even if they drive the price up multiples without being abused, and if they convert options unless wrapped within a tax efficient scheme they get massively whacked with income tax. Management should simply do their job, and do it well, for fair compensation. Just like most people are expected to do today. And anyway, imagine if your employer kept banging on to you about lumping your earnings into shares in the firm just to keep your job and show you are aligned.
When prices are sliding, we look for reasons why somebody or something else is to blame.
Generally, they are not to blame, but often neither are you, it’s just the way the cyclical resource market goes and as long as you have only invested what you can comfortably live without, for a good while, then patience usually does the trick and a bit of stock selection helps along the way.
So why stay invested through the cycle? Why not sell at tops and buy at bottoms.
Nice idea and I have thought about it a lot. I am just not really good enough as an investor to make it happen.
However, let’s just say I could do the first part and sell at the tops.
The problem is you don’t really know it’s the top. And if it keeps on going higher after you sell you get priced out really quickly and buying back in is different on many levels.
If you are right and prices fall great. But when do you buy back in? If you buy too early you still can suffer capital losses quickly. If you wait too long and miss the upturn you can be priced out of the market again.
I have seen stocks fall from 5p to 1p and then rebound so quickly.
If you sell at 5p and it drops to 3p you probably will think it might drop further and wait. When it drops to 1p you think its on the way to 0.50p. Then it suddenly springs to 2p and its overvalued and you wait for the pull back. Then it’s at 3.5p and it’s definitely going to pullback. Then it’s back at 5p and you now think this is nutty and wait for 2.5p again. Then it’s at 7p and you are not going to pay a 40% premium to the 5p you sold at. Then its at 10p and clearly overbought. Then you drop it off your monitor because you can’t take it anymore. But a week later you can’t help yourself and take a sneak peak …. Feck me its at 16p and rising. You have been priced out and the whole process can happen in a few weeks or months in some cases.
For me now I try and position myself in a diversified way within the sector. I stay within natural resources because I feel it’s a compelling sector at this time. The world needs base and strategic metals and will consume vastly more going forward than it has in the past. The world needs precious metals because it’s financially frail and confidence soon enough will be benchmarked against gold and silver.
Some degree of ongoing portfolio juggling is good to stay exposed to the better opportunities for capital growth, based of course on the outcome of your research and personal opinion.
Also, reducing positions when shares move dramatically higher is validated by any sensible risk management model, even if they could yet go up further.
My aim as an investor is to see higher highs and higher lows as the sector moves higher (probably) over the coming years and maybe decades. I must stay with the rollercoaster route and stay in the game all the time because I am not good at selling at the right time and buying back at the right time.
So, I sit and wait.
My dream is that just one or two of my holdings move dramatically higher whilst the rest of the market languishes for a while longer. In that case redeployment of capital can afford stunning returns. However, the reality is we in junior resource investing labour under a cyclical market where, when the tide comes in, all boats rise (or at least the vast majority do).
Most of us now would be happy just for the tide to start coming in.
I applaud those who have the guts and determination to invest in resource juniors at the moment and fervently believe there are incredible returns possible. We are investing in a potentially life changing sector and notwithstanding the risk, personally I wouldn’t want to be anywhere else.
Author: Paul Johnson