I haven’t been so lucky with some of my other speculative plays such as Cordoba Minerals (CDB.V) and Sarama Resources (SWA.V) — those positions have lost most of my invested capital and are deep in the red. Thankfully, I sized those positions appropriately (more on position sizing below) and the losses were manageable and covered by the gains in my winners.
Holding & letting your winners run: Sometimes, my emotions still try to get the best of me.
When you have had a good run up and sitting on massive paper gains, it is tempting to sell and book those profits. Eric Sprott had a great thought on this.
To paraphrase, what he recommends is not to look backwards and look at what a stock has achieved so far and sell too early instead of letting your winners run and grow; but rather to stay forward focused; i.e., can the said company do even better and grow going forward? Kyle Bass has a good quote on this: “The past doesn’t necessarily tell you how the future will play out”.
Momentum trades: A quick note on momentum.
When there is massive liquidity flow into an asset class or stock, combined with my previous point of “Rising tide lifts all boats”, it is hard to evaluate and make a quick decision on some trades. Sometimes, you just need to “fire and then aim”. Due to momentum, the price gets away from you and you then suffer from Anchoring Bias (you stop and hope that the stock price will come back to that number you first started thinking of investing at, but it never does).
This has been a reality for me over the last year especially in the crypto market and the marijuana market, although the momentum has died down recently. But again, this all comes down to liquidity flow — which is where most of the money can be made.
“Bear markets are the author of Bull markets and Bull Markets are the author of Bear Markets” – Rick Rule
This one seems pretty obvious, but most of us tend to forget this. Our biases get a better hold of us and think that the good times cannot end (and likewise, bad times will not end). The deeper and worse bear markets are, the better the following bull markets tend to be and vice versa. This is not only true in the resource and commodity sector, but applies as a general investing principle.
Position Sizing
“Even the best managers in the world have difficulty with sizing positions. Positioning is very correlated to conviction level. Look at risk management in totality. Position level and portfolio level. Have position level stops or targets. Portfolio wide have risk levels of down 2%, down 5% and down 10%. Down 10% is almost mandatory risk reduction across the board to live again another day. Think about enormity of correlations when positions are large.” – Kyle Bass
Position sizing is probably the most important aspect of investing. If your portfolio is not diversified appropriately and/or you do not size your positions to fit your risk tolerance, there will be lots of pain to endure.
Position sizing may not be such a problem on missed opportunities or betting too small — for e.g., if you decided to take a gamble on something and in a matter of days, you end up with a multi-bagger on a small/tiny position. You are then only left wishing that you had a bigger investment and hope to size your position appropriately next time. But the flip side is extremely dangerous.
If you analyze incorrectly and take too big a position, that can lead to portfolio annihilation. I got a first-hand lesson in this last year when I initiated a position in Novo Resources Inc (NVO.V). It was a promising play on gold exploration in Western Australia, but I didn’t position appropriately. I went with too big too soon instead of buying in smaller tranches just as the stock price peaked and then dropped by almost 50% over the next few weeks/months. The good news is that the stock has recovered quite a bit and I remain invested hoping to come out on top by staying patient.
For the record, following is my ‘Metals & Miners’ portfolio — which makes approx 50% of my total investable portfolio.
Investing vs Speculation
This is something that I find most people will disagree with me. I have gotten into heated arguments on this topic in the past few months. What is investing and what is speculation? For most investors, it seems that buying stocks in large companies that have been around for a long time is “investing”.
If you invest in small companies or new technologies (e.g., junior resource companies or cryptos) thats “speculation”. I vehemently disagree with this notion. There is no black-and-white when it comes to this and what is one person’s “speculation” can be another person’s “investing”. I think there is far more speculation involved in the broad markets these days than say something in junior resource sector.
Journal/Log all trades
I find that journaling/logging (blogging in my case) all trades about what I was thinking at a certain point in time is extremely valuable. The key to learning is to look back and reflect on the trades and how the thinking has evolved. Writing down the ideas and re-evaluating is a critical aspect during an investor’s journey.
These are some of the things I’ve been thinking about lately, and this is just barely scratching the surface.
This article has been republished with permission from Modest Money.