There is an investing adage: “You either learn a lesson or make a profit; never both”. I have found this to be true for a better part of my investing years, but as I gain more experience, I am trying to reflect and learn lessons from all my trades – from both winners and losers.
This bull market in stocks has been ongoing for a decade and most investors have forgotten what it is like to lose money and come to witness heart-stopping moments when you suddenly see your envisioned future disappear. I first started investing in individual stocks in 2008, just before the Global Financial Crisis and that was a great teacher.
I try to remember the lessons I learned back then and continue to learn new ones everyday. Over the last couple of years, I decided to move a big portion of my portfolio into the precious metals and mining sector as I saw more value and the sector was hated by many. My reasoning is fairly simple: when the markets crash (and they will), most investors will seek safe havens, and there is no better safe haven than gold. There are a few other reasons, but that is the big one.
Over the last few quarters, I have been finding so many interesting prospects for investing in the sector, that I have overshot my initial target. The sector now makes 1/2 of my overall investing portfolio. Even with a few sales over the last few months, I have been hovering close to the 50% mark due to good returns. And the bull market in gold/silver mining stocks is just getting started!
While I look over the overall portfolio composition, I am being reminded of a lot of investing lessons from each trade. So, I decided that I will share some of these thoughts (including some random observations) here. Hopefully you will find the thoughts valuable & interesting.
“Buy what’s hated”
This is a different take on one of the most cliched saying “Buy when there is blood on the streets…”. Everyone says it. No one follows through. If a potential investment does not make your stomach churn and make you want to run for the hills, then it hasn’t hit rock-bottom yet.
I started buying gold equities in late-2016. Even though I was about 6-9 months late to the party of catching the bottom, I am still ok with this. It is almost impossible to time the market perfectly. But as my friend Jay from FI Fighter likes to say: “You will never capture the bottom 10% or the top 10%….focus on riding the 80%”. Even today, there are plenty of investors who hate gold/silver and laugh at people who like to own “pet rocks”…which just tells me that I can continue to position appropriately before the next crisis.
“Rising tide lifts all boats”
When you get to participate in the early stages of a bull market, there is some leeway in picking the right stocks. Of course, you want to pick the best companies and hold them for a long time to grow your investment. But if you are early in a bull market, you can make a few mistakes. You can pick a few subpar companies and still come out on top. Lesson to learn here is to not mistake the bull market & liquidity flow to hubris in good stock picking abilities; or as Rick Rule puts it: “Don’t confuse bull market with brains”.
Speaking of liquidity flows…
“Earnings don’t move the overall market… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.” – Stanley Druckenmiller
I have found this to be extremely true. Liquidity flow is what determines the returns in stock markets. You can own the best company in the world, but if there’s not enough followers and funds aren’t pouring in, you will end up with a Value Trap. I have experienced this play out both in my favor and against me.
This worked in my favor when it comes to Kirkland Lake Gold (KL), my largest position today. The company has been firing on all cylinders with excellent management team (chaired by none other than Eric Sprott), world-class resources, low cost productions, fantastic financials, and the list goes on. In addition, the company is cross-listed strategically — first on TSX, then cross-listed on NYSE & ASX.
Related: Connecting Economic Regimes to Factor Exposure
You will be hard pressed to find a better company in the sector today, and I believe that the company is still undervalued. Every month, analysts continue to re-evaluate and re-estimate the resources and continue to raise the price target. About a week ago, it was deemed just the Fosterville project in Australia is worth $4B, while the whole company now trades at a $4B market cap. It also helps that KL holds one of the top spots in gold-focused ETFs — a crucial aspect of liquidity flows.