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What a Disaster This Investment Has Been
By: Chris at www.CapitalistExploits.at
When I was younger, 16 I think, I wanted to be George Soros. Horror, I know given that there are probably parts of the world I'd be dismembered in the streets for uttering such a comment. Grumpy old bastard with abhorrent political ideas.
Yes, all true but at the time I wasn't focused on any of that. I'd read about his shorting the pound - $2 billion in profits with $1B of that in a single day!
I'd just gotten interested in currencies. A strange thing you may think for a 16-year old and you'd be right, but I was living in a country with capital controls and was beginning to think through how I was ever going to "get out". Tand this led me to investigate how rich people "got out", which in turn brought me to reading about rich people...enter Soros.
In any event, rightly or wrongly, I viewed Soros as the little guy who bet against the big guy and won. A modern day David and Goliath story. Who couldn't appreciate that?
Soros made a fortune on an asymmetric trade, but there are others of more recent fame. Let's see:
- Andrew Lahde
- Made 1000% shorting the US subprime market.
- John Paulson
- Made $4 billion shorting the US subprime market
- Kyle Bass
- Bought Greek CDS and made 70,000%. He also made 600% shorting the sub-prime market and from 2006 to 2009, his fund returned 340% net of all fees and expenses while the S&P 500 has returned -42.3%. The fund’s annual return was a whopping 85% for the 3 year period mentioned.
What I takeaway from this, other than Kyle Bass being an obvious underachiever, is that when a lopsided market turns, fortunes are made.
Now, you'll notice that the above mentioned trades involved short selling. One reason that short selling occasionally produces such spectacular returns is because typically short selling is a loss-making proposition. Precisely because it all too often produces losses, is exactly why asymmetry builds up allowing for such amazing returns to be garnered when the imbalance is finally corrected.
We've mentioned previously where we believe asymmetry lies. In the Japanese Yen, which we discussed here, here and here, and more recently Brad's shorting of the Renminbi which we detailed here. These are trades which we'll just keep rolling as part of a broad asset allocation and risk management plan. We believe our ship will come in and we'll be patient until such a day arrives.
What I'd like to look at today is a sector I think well worth a bit of scrutiny... miners. Oh, what a dirty word!
Before providing you with the basic investment thesis, I'd like to review an article we published entitled, “Buying Bombed out Equities for Outsized Returns”. In it we provided some stats worth reviewing.
Average 3-year nominal returns when buying a down sector (since 1920s):
Down Avg. Annual Return
60% = 57%
70% = 87%
80% = 172%
90% = 240%
Average 3-year nominal returns when buying a down industry (since 1920s):
Down Avg. Annual Return
60% = 71%
70% = 96%
80% = 136%
90% = 115%
Average 3-year nominal returns when buying a down country (since the 1970s):
Down Avg. Annual Return
60% = 107%
70% = 116%
80% = 118%
90% = 156%
Notice that the second column is the average annual net return. Now, average is... well, average. Imagine you put even a little bit of effort into a sector, country or industry.
The beauty of what I'm sharing with you is that if you just focus on the numbers and take all of the emotion out of the equation, it's no longer about being contrarian or trend following; it's purely about following a statistical formula. While that is no guarantee that the particular sector, country or industry you're tracking will perform as indicated above, it does provide a proven process, and we've got the data to prove it.
In light of the above I present to you one of the most horrific investments of the last few years (one which we've recommended on occasion, ugghhh): gold mining stocks.
The GDXJ ETF is down 87% from its high in late 2010, and the GDX ETF is down 74%. Statistically we could expect a pretty spectacular return going forward. Both seem like they're still in free fall and I'm not here to pick a bottom., I'm just playing the odds. Nobody and I mean nobody wants to have anything to do with this sector. The odds look decent to me.
Now these are the ETFs of course, and the problem with mining stocks in the ETFs is that most of them are complete garbage and will never make any money. At least not for shareholders.
For this reason we put together this list of mining companies - all selling for less than cash.
I humbly suggest that simply remembering the statistics above and then buying a basket of better performing companies which are selling for less than cash on their balance sheet, will reduce overall portfolio risk, provide potential for outsized returns and should the strategy work out with the sector rebounding, the returns on the stocks here should theoretically outperform the index or ETFs.
Just remember this isn't a call on gold going through the roof, or anywhere at all. It is merely looking at asymmetric trading opportunities.
Best of luck!
- Chris
"A stock operator has to fight a lot of expensive enemies within himself." - Jesse Livermore
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Maybe if mining companies were not run by idiots and frauds this might be true. The fact is they were never profitable at any point in the last ten years. All they did to make money was sell more shares and take on debt. The accounting they use is ridiculous too. If they are stupid enough to let some FOREX paper traders set the price of their product below production costs, they deserve to go out of business. I will buy PMs all day and all night. But I don't trust miners. Miners are paper/fad trade only. Meaning you buy them when they are rising, period. Other than that, walk away. They could be out of business any time. If they get together and take on the price setting cartel, maybe I will change my mind.
When I was younger, 14 I think, I put all my eggs into Bradford Exchange collector plates.
You know the type Wizard of OZ, Elvis and Gone with the Wind pictures printed onto plates.
WTF?
And of course there is NEVER a downside - just 100%, plus, return for everybody. </s>
There are thousands of pubically held companies doing extremely well whose stock price does not reflect the value underlying. Has been, always was, and always will be.
So it's not enough to simply recognize that there are companies on your list and in your philosophy (Hamlet, Act 1, scene 5) that should be bought.
Unless there are more buyers than sellers, and volume propelled by a 'story' or P.R. department that routinely gets those companies in front of the business news, they are going to languish and never reflect their true value.
What makes Amazon's stock price levitate is not its value, but its constant referral by everyone, contributing to massive sales volumes.
Miners that sell at less than cash are by all means bankrupt now. Don't.
For asymmetrical plays, I stick to liquid papers. Why bother with physcals unless you control them. Even if you have saints managing companies with physicals and low debt, you are risking their cash flow haemorrages that includes their compensations.
My oft experienced rule is: Just because it's high it doesn't mean it won't go higher and just because it's low it doesn't mean it won't go lower.
Nice list of companies. I suggest looking at Malachite Resources (mar.ax). It's in my own back yard, I have visited the site. Explorer turned soon to be producer. Company carries no debt and owns the entire site. High grade ore, open pit mine, production cost is around $850 aud/oz. Will be processing ore prior to Q1 2015. Current s/p is $0.008 it is a give away. Liquidity is an issue at these levels though and could be an issue for some investors. Nevertheless they will turn a decent profit at these gold prices I can only imagine where the s/p will be if the gole price were to go higher in 2015 even just slightly.
I figured this was going to be about gold and silver...
When your product has to compete with a paper 'equivalent' that can be produced in unlimited quantities you will lose.
and then....when the paper market dies and gold does rise in value....how will governments view that sudden and drastic 'windfall'?
I'll stick with just the metal and let those who seek leveraged returns take the big risks.
I'm not telling you to Do What I am Telling you to Do. ?
Fuck it, i'm just going to go all in on Mountain House Chili Mac N' Beef.....
https://www.youtube.com/watch?v=uKL3b79QyGo
Go with the Turkey Tetrazzini. I mean, they're all good but some are better than others.
By all means, but add bacon cooked in a microwave. I buy hogbellies.