Editor’s Note: Casey Research Founder Doug Casey believes we’re at the very beginning of a new gold “mania.” In the coming years, he expects certain gold stocks to rise 500%, 1,000%, 2,000%, or more.
In yesterday’s special Daily, Casey Research’s gold stock guru Louis James explained how he finds gold stocks with huge upside potential. Today Louis concludes his lesson with key advice on maximizing your gains in mining shares…
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From Louis James, senior investment strategist, Casey Research: Here’s how to make volatility your friend: buy low and sell high.
That’s easier said than done.
To make it work, you have to be a contrarian investor. That means backing up the truck for stuff no one else wants.
It may be a cliché, but it’s true: The best time to buy is when there’s blood in the streets. And the time to sell is when everyone else piles in to the market you knew would go up.
Of course, this only applies to investments that have value. Buying after the pet rock market crashed in the 1970s was not a great move. But buying copper when it fell below the cost of production in 2001 was. The world still needed copper then, needs it now, and will need it in the future.
In an ideal world—or at least one in which we are immortal—disciplined contrarians could amass limitless fortunes. All they’d have to do is buy necessary goods after total market meltdowns and sell when the masses pile in.
Unfortunately, these cycles can last 10 or 20 years. That’s well beyond the patience of most investors.
Enter our friend: market volatility.
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Economists like to imagine that markets are rational. Experience tells us otherwise. Markets are often more volatile than pure theory predicts. Resource markets, and precious metals markets in particular, are among the most volatile.
Markets are made of masses of individuals, each with his or her own beliefs, fears, and needs. They don’t always make the same decisions, but sometimes large groups fail to value assets accurately.
Frequently, painful experiences cause investors to exit an asset class en masse. This results in an oversold market. That means that the average company in that market is selling for less than it’s worth. The opposite is true in an overbought market.
Such market momentum is, frankly, stupid. But it’s real. And it often happens many times within larger megacycles. Whenever it appears, it’s an opportunity for contrarians.
But even such intra-cycle momentum can last years.
Enter our best friend: extreme volatility.
Most juniors trade on very little volume. When a company has fewer than 50 million shares outstanding, investors might trade fewer than 100,000 shares each day. Some companies trade fewer than 10,000 shares a day.
The low volume results in frequent extreme volatility. That creates frequent contrarian opportunities…
It’s gut wrenching until you get used to it. Shares in a solid junior with great management, cash in the bank, and a major new discovery unfolding can drop 20-30% just because a large shareholder facing a margin call is forced to sell. They can also soar 20-30% because of a spectacular drill hole.
If you missed the bottom of a megacycle, or even the current market momentum trend, don’t worry. The extreme volatility of juniors often creates last-minute buying opportunities for the savvy speculator.
This is great news for investors late to the game. It’s even better news for those who’ve been paying attention and have a shopping list of great stocks ready. There’s always a contrarian opportunity somewhere, whether it’s long or short.
When to Buy Juniors
Obviously, the best time to buy junior gold stocks is when nobody else wants them… but there’s more to it than that.
Start by asking yourself what kind of speculator you are. Then pinpoint the market trends you truly believe in.
These may seem like abstract ideas, but they are absolutely essential.
Consider…
If you are cautious by nature, but you believe that gold will rise over the coming years, then focusing on profitable producers is your sweet spot.
If you’re keen to maximize gains and willing to take higher risks, early-stage gold explorers are the way to go.
If you’re somewhere in between, like most people, advanced explorers moving known discoveries towards production offer high returns with reasonable risk.
If you think silver has more upside than gold, replace “gold” with “silver” in the checklist above.
Even the largest and most stable mining companies in the world are more volatile than most investors are used to. The underlying commodities themselves are so variable that standard securities analysis just doesn’t apply.
You need to understand why you place the bets you do. If the stock drops despite the company delivering the goods, you need to be so sure of your premise that you don’t panic and sell (at exactly the wrong time).
This level of discipline is only possible if you are certain in your reasoning and your picks are sound. Even then, it’s hard. If it were easy, everyone would do it and there’d be no profit in it. That’s why you have to start with a little soul-searching.
Clarity brings confidence. Confidence enables discipline. Discipline is essential for success as a speculator.
Buying in Tranches
One more thing on when to buy…
Even when all the stars align, and you’re sure you’ve found a great pick, do not buy all of your shares at once. Buy in “tranches.”
When you first decide to buy, buy a fraction of your ideal position. We recommend 20%. If the stock happens to take off for the moon the next day, at least you’ll have a stake. You’ll record a win, even if it’s not as large as you’d hoped. A win is still a win.
We discourage investors from going all in because markets fluctuate—the juniors market more so than almost any other. Having a stock take off the day after you buy is so rare that it makes no sense to give it much thought.
Instead, expect the stock to dip at some point after you buy. Then buy a second tranche. We recommend another 20%.
This way, you end up with 40% of your ideal position at a lower average price than if you’d bought all 40% at once. This increases your upside on a much more substantial position. Then hold tight. If the company delivers, you’ll bag a nice win.
On the other hand, if the company keeps delivering but the market suffers a major correction, the shares will likely drop to stupid-cheap prices. That’s the time for a speculator pounce with gusto, preferably on a day when the market is off sharply.
This is when you place a “stink bid”—an order well below the current market price—for the other 60% you’ve been waiting to buy. Now you’ve filled your ideal position at a huge discount to the price you liked in the first place.
Note that this is different from averaging down on a company that fails in some way. We don’t give failing companies a second chance to cost us money.
The idea is to build a position in a company that is creating value for shareholders, even if—especially if—other shareholders don’t see it at the time.
And then, come payday, you reverse the process. Sell in tranches when everyone else is buying.
We take profits whenever a stock doubles for the first time. We call this a Casey Free Ride. After recovering your initial investment like this, you ride whatever upside is left, 100% risk-free. Nothing beats speculating when you can’t lose.
When the people who told you that you were crazy for buying gold juniors jump on the bandwagon, it’s time to head for the exit.
That’s how you buy low and sell high.
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A Question of Courage
Speculating takes courage.
If you start as we suggest, with careful thought about yourself as an investor, and determine that hunting for 10-baggers is not for you, you should hunt elsewhere. No regrets. Unless you’re truly comfortable with contrarian speculation, you are guaranteed to lose money.
It bears repeating: Courage and discipline are absolutely essential.
But consider this: In the wake of the near-collapse of 2008, governments around the world have done everything imaginable to prop up the global economy. They have also done the unimaginable, like taking interest rates negative and tripling central bank balance sheets in a matter of months.
The amount of money governments have “created” from nothing defies belief. They don’t even bother to print the stuff anymore…
There will be unintended consequences.
In short, anyone who thinks mainstream investing is safe today is kidding himself. We are all speculators now. The difference is that some of us know it.
Doug Casey likes to put it this way:
Rather than risk 100% of your portfolio for 10% gains, risk 10% of your portfolio for 100% gains—or more.
Yes, if you speculate as we do, you’ll lose on some picks. You may even lose on most picks if you push for maximum returns. But the doubles, triples, five-baggers, and 10-baggers will more than make up for those losses.
If you have the courage, this is how you play to win.
Reeves’ Note: If you’ve got ready funds allocated for “smart speculations,” now is the time to take a position in gold stocks. Entry points like these only come around once or twice a decade. Gold mining shares have already surged 69% this year… but the bull run is just getting started…
For a few more days, Casey Research is running a special $500-off deal for its elite gold stock research. When you sign up, you’ll get instant access to Louis’ new report, “9 Essential Gold Stocks to Buy Right Now.”