Stock Picking is Far From Dead!
For speculators and market participants the last eight months have been extremely tough going and for the stock pickers amongst us the viability of our strategy would have been tested.
The junior resource sector after a positive start in January/February 2011 has been decimated due to extreme Dow volatility and European debt concerns despite strong precious and base metals prices on a historical basis.
When I entered the broking industry in 1998 my aim was to identify juniors that had the potential to increase five times to ten times in value.
What upset this process was the lunacy that was the Dotcom bubble where anyone reporting a move away from mining and into something tech or website related was rewarded with a mind boggling market capitalisation.
Mining shells were suddenly transforming into what were at the time, “investment grade” stocks and the madness continued until mid-April 2000 when the NASDAQ and Dow spoilt the party.
Since Dotcom there have been a number of bubbles in iron ore, coal, childcare, retractable syringes, potash/potassium and in 2006/2007 the uranium bubble was spectacular as it was frightening when buyers were simply exhausted.
Prior to the recent carnage on world markets both geothermal and shale gas were looking likely prospects and it remains to be seen whether or not their stories will continue to evolve with renewed enthusiasm.
Despite fads coming and going there were still juniors graduating through the ranks and a number were still able to see multiple share price upside amongst the negativity.
When Ramelius Resources) drilled into 48 metres at 154 grams per tonne gold in May 2007 those who purchased and held the stock through the tax loss selling of June 2004 were rewarded with a 50-bagger.
Those who kept the faith in Sandfire during its friendless days, sub 10c, were duly rewarded in 2009 with the discovery of high-grade copper at Degrussa that resulted in its share price eventually powering past $8.00.
Sandfire Resources’ Degrussa project. Source: Company web site.
If you had access to a Delorean during the Global Financial Crisis I am sure we all would have loved to have gone back in time and scooped up all those sub 20c shares in Ivanhoe Australia, which despite listing at $2.00 found itself a penny dreadful shortly thereafter.
The Merlin discovery did not hurt its cause and propelled the company’s share price through $4.00 in November 2009.
What I have found with the benefit of hindsight it is that almost every financial panic and severe market correction provides the best buying opportunities and odds of nailing a ten-bagger.
I have also learnt that when you are being bombarded with negativity and find yourself glued to CNBC at all hours it is often hard to think rationally about the fundamentals of some of the junior resource companies you know you should be buying.
I have also discovered that being a stock picker – no matter how hard the going gets – actually pays off in the long run and keeps you in the game until the next bubble arrives.
Here are some “rational thinking” exercises I apply to some of the junior resource companies I am holding. I will not name the companies; however, you should get the idea:
– Market capitalisation is $14m and they have $7.5m in the bank. A good start!
– They have a gold plant ready to produce gold and JORC resources.
– They are building their ground holdings in areas that are in viable carting distance from their plant.
– The stock is very tightly held and management seem enthusiastic, passionate and experienced.
Now surely something must be wrong here?
What could happen once the market improves and others start to see the value?
What if they actually succeeded and how great is the upside potential?
Here is another one:
– Market capitalisation of $13.9m with cash/investments around $8m.
– Management team responsible for one of Australia’s largest mineral discoveries in 2001.
– A high quality industrial metal project, with a pending iron ore resource and a gold project that has the potential to be revitalised.
– An excellent flow of high risk/high reward projects that offer shareholders multiple upside potential.
I could apply this to a number of other companies; however, it is apparent that what we are experiencing is an abnormal market where fundamentally undervalued juniors are suffering from broader economic issues.
Whilst it is terribly difficult to be on the buy side during market meltdowns, I have noticed that fundamentals have a habit of coming to the fore and regardless of what happens in Greece stock pickers are still going to be eventually rewarded if their research stacks up.
If you are game enough to look at a top 40 music chart you will struggle to see many songs created only using guitars, bass and drums.
It does not mean there will never be another decent rock album released, it just shows that trends and fads will emerge but deep down all of us forty something’s know what real music is.
The art of stock picking has been around for hundreds of years and the strategy of buying low and selling high will remain constant as long as stock markets are allowed to operate.
Looking back, what we are experiencing now feels similar to the fantastic buying opportunities that presented themselves in 2004.
The key for stock pickers is to be able to think rationally during irrational periods and not to be scared out of sound investments.
Out of the current malaise there will be a number of major discoveries and once fear is replaced with the “fear of missing out” we may even witness the return of the speculative bubble.
Stock picking in every bear market will be tested as a viable strategy. However, it is far from dead.
Tony J Locantro
Email: tony@locantro.com
About the Author: Tony Locantro is the Managing Director of Gold Australia Pty Ltd, the publisher of Locantro’s Life.
This article was sourced from the December 2011 edition of 