-- Posted Thursday, 6 November 2003 | Digg This Article
Here is a good question that in my opinion is being totally ignored.
And the question is how do we minimize our risk when investing in gold equities? Presently the question most asked is, “How do we maximize our potential return?” Well, I think we need to be reminding ourselves that we need a plan on how to MINIMIZE our risks also.
Over the years I have read a lot of stories about folks who have come into large sums of money via the lottery, a fat inheritance or they strike it rich through a successful business venture or even the stock market. And most folks do not know how to handle this new influx of wealth. And consequently they proceed to lose what they have been so fortunate to acquire.
Personally I believe it is more difficult to handle prosperity than in trying to cope with poverty. The problem with coming into a windfall is the ability to exercise discipline. In all that I am reading presently about this gold bull there is not enough being said about how to lock in profits or to minimize potential losses.
All I do hear over & over & over is which stock is going to the moon & the advice for investors to “hang in there” while they wait for their particular “chosen” stock to become a “100 bagger”.
But aren’t we forgetting something important here?
Anybody out there ever hear of a fellow by the name of Warren Buffet? And no kin to Jimmy either.
Of course you have heard of Warren & let’s listen to a statement by Warren recently.
…Warren Buffett is worried about the dollar.
The U.S. government deficit has "greatly worsened," he said, "to the point that our country's 'net worth,' so to speak, is now being transferred abroad at an alarming rate." The budget deficit this year is nearly twice the previous record.
"Our country [the U.S.] has been behaving like an extraordinarily rich family that possesses an immense farm," Buffett warned in an interview with Fortune magazine.
"In order to consume 4% more than we produce - that's the trade deficit - we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own." Continuing his analogy, Buffett goes on to explain that, as foreign ownership of the "farm" grows, income flows out of America… Bill Bonner & Addison Wiggens, Daily Reckoning, 10-29-2003
I can’t think of a greater reason to see gold continue to strengthen than just on this info that Warren Buffet just shared. Let’s hear this again.
“…the trade deficit - we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own…”
We have been talking a lot about selling & I find it interesting that the US is itself doing a lot of selling as a country but what are we buying in return? The US is purchasing DEBT that will eventually be called due by the lenders.
Let me share some very practical data from a great gold analyst.
Paul van Eeden: … As I take profits from maturing investment ideas, I reinvest the proceeds, mainly, in other gold related investments. … Paul van Eeden/Tim Wood Interview, Mineweb.com 10-29-2003
http://www.mips1.net/mgn03.nsf/Current/80256DCE0038757A85256DCC00562BF4?OpenDocument
I like this comment & because what Paul is saying is important & there is a good point here let’s read part of this again.
“…I take profits from maturing investment ideas, I reinvest the proceeds…”
But do you know what?
As simple as this statement is most folks cannot do this because they do not have an exit or selling strategy. I like these 2 principals & they are that we sell & take profits & then re-invest.
Yes, as investors we should be selling & reinvesting. You notice I leave out entirely the act of buying as I believe most folks have got this practice down pat. But it remains the discipline of SELLING that must be drilled again & again into the brains & habits of investors. And I am not talking about indiscriminate selling but selling that follows a predefined formula & plan.
But as I said most investors cannot do this because when they see their stock holding going up they get all excited & the last thing they do is contemplate when they should sell. The excitement & greed of watching a stock go higher & higher is just awesome & the discipline it takes to sell at this point is just not there for most folks.
I like Paul van Eeden. Let’s listen to what else he has to say.
Paul van Eeden: … I expect the gold price to increase beyond $1,000 an ounce and because markets have a tendency to overshoot on the upside, I would not be surprised to see gold much higher even than that.
… It’s merely a matter of time, not much mind you, before gold breaks decisively through $400 an ounce, and then $500 an ounce, and then $600 an ounce…
…But we are in the beginning of a secular bull market in gold…
Paul van Eeden/Tim Wood Interview, Mineweb.com 10-29-2003
http://www.mips1.net/mgn03.nsf/Current/80256DCE0038757A85256DCC00562BF4?OpenDocument
And how about excerpts from another great & respected legend.
Richard Russell last evening:
Let me put it this way -- we're entering a period where the lust for financials will gradually evolve into a lust for tangibles. We're early in this "transfer," and it will intensify in the months ahead.
The flagship for the tangibles is gold -- gold because it's priced in all currencies and is quoted every minute and every hour of the day. Gold because gold has a 5,000 year history of being accepted as real money. Gold because it's accepted without question anywhere at any time any where in the world. …
So I'll repeat it -- we're in the early stages of a trend away from financials and into tangibles. LeMetropole 1030-2003
But lets get back to the title of this article which is how do we minimize risk?
OK.
I know there continue to be those hard core individuals that want to risk holding all of a stock issue all the way to its extreme peak. Let’s look & play with some numbers a moment to see the consequences of a possible selling strategy.
On March 24, 2003 I said to buy a particular stock that was a good buy at .60 Canadian. I take zero credit for this judgment call as any idiot familiar with what this company had knew that this was a very undervalued price & a great buy.
Well, this climbed up to 2.71 Canadian 9-13-2003 & I stated that now would be a good time to sell half this issue. And let’s play with some numbers to see what our consequences would now be.
If you originally spent say 5,000 Canadian dollars at .60 way back in March when it was .60 then at the middle of September with a stock price of 2.71 your stock would have a total value of 21,508 Canadian.
Let’s say you now sold half of this 21,508 with the stock now at 2.71. Now you have 10,754 in your back pocket. You have your capital back plus some extra. And you keep the other half in the stock to take advantage of any potential further price appreciation.
As of the end of October the stock has now moved higher to 6 dollars a share. So what do you have now? The 10,754 you left in the stock when you sold half is now worth 23,810 Canadian & you still have your original capital that you pulled out at 10,754.
And what is my point here?
That selling religiously to get your capital back & maybe extra is not going to rob you terribly in the future. The name of the game is to sell at some point & in my opinion unless you are a professional you should NEVER attempt to ride any stock all the way to the top.
Be a conservative & cash some of it out.
The following is an email I received the other day.
Dear David:
I love you, I love you, I love you.
I listened to your advice about selling when my gold stocks DOUBLED & I have booked $92,000 of profits this year! I just bought a new Ford Expedition for my wife with a portion of the profits! …
This is the angst of the investor who didn't make as much money as they could have, but made a lot of money anyway. The upshot is that if I hadn't listened to you, I wouldn't have the $92,000 dollars of profits in my account.
I am indebted to you for teaching me that you DON'T MAKE MONEY
UNTIL YOU SELL!
Thank you for your timely advice!
Sincerely,
RKD
I like this email from this reader because it helps to prove a point I have been making over & over & over again. And that point is that investors today are not being taught to develop & to practice a practical & prudent selling strategy.
Let’s all of us say together now & repeat what this investor learned about making money:
“…you DON'T MAKE MONEY UNTIL YOU SELL!”
A professional money manager or broker spends every hour of his working day studying & learning about the markets & when to sell. But the medical doctor spends the bulk of his long day practicing medicine, an attorney spends his long day in the court room & the businessman running his own business is spending his long day pouring over his accounts & balances.
Where does this lead the average working man with the time to determine how long he should ride a stock on the way up before he or she sells?
And let’s listen to another email from a reader.
Dave, keep hammering away on your selling strategy. I think I’m beginning to get the message.
J.
The fact remains that in every bull market too many investors hold on for too, too long & end up losing everything. I continue to stress & to believe that for the average investor part of his selling strategy should be to sell half a stock issue as soon as it doubles.
Imagine investing 25,000 dollars that doubles & becomes 50,000.
Go ahead & sell half this baby. And what are your practical consequences? Now you have recouped your original 25 grand that you can re-invest in another promising investment & the remaining 25,000 that you keep in the stock issue becomes risk free (because you have recouped your original capital). And this 25,000 is staying in the stock to take advantage of any further gains.
How can you lose with this strategy?! Think about it!!!
So getting back to the title of this article – “How do we minimize risk?”
We minimize risk by learning to develop a disciplined & practical selling strategy.
And also remember this. The professionals always want to be the FIRST to sell while you are still holding on. You will never see professionals teaching the little investor how & when to sell strictly so he can always be the first to take his profits out. Start paying attention to what other analyst are saying & you will notice they are telling you to continue to hold on just a little while longer.
The name of the game is that the professional sells & takes his profits & you are left holding on long after the stock has climbed to its peak & already begun its descent. The name of the game is to get you to buy but to NEVER sell!!!
Now let’s take a break & talk about this fall season.
Have a lot of you been attending fall festivals this past week or so? My wife & I have & let me tell you they have been exciting!!!
We went to one local church fall harvest festival that had goats for the kids to play games with. A red ribbon was tied to the tail of “Dale” the little Billy Goat & then the little kids (including my own) would chase that ole’ Billy Goat around & around trying to pull that ribbon off!!!
It was exciting!!!
In all honesty I just was saddened to think of the boring time all the folks must be having that went to that investment conference down in New Orleans. Walking up & down Bourbon Street chasing who knows what when they could have been in the Carolinas chasing Dale the Billy Goat.
And the night before our church had its own festival on Halloween night with a big bon fire & a tractor with a trailer filled with hay for that proverbial hay ride. And we had a blast!!! I ate 4 hot dogs that night & drank 3 (actually 4) hot chocolates! I’ve got to cut back!
I love fall & all the fun festivals so much that I even find myself forgetting momentarily about gold!!!
While most newsletters are focused only on reviewing & covering the same companies over & over & over Gold Letter Alert is dedicated to continually seeking out new & different mining companies.
Gold Letter Alert is for the investor desiring to spread his risk among a multitude of different gold & silver mining companies that may have not yet been discovered by the main stream of gold investors.
Also, we recommend to our subscribers when to sell whether they like our timing & selling strategy or not.
And your subscription to Gold Letter Alert is for LIFE.
Subscribe to Gold Letter Alert!
http://goldletterdv.com/subscription.php?uid=d3961c0bba2a2cfbb434bd5651c2e667
“Science & magic lie at opposite ends of the spectrum spanning reason & faith. …among the questions that make adults out of the rough clay of childhood are: Which side are you on?” The Man Who Changed How Boys & Toys Were Made, Bruce Watson, 2002
I like the statement above because in my opinion it describes the stock market & its perception by most investors.
Professional investors view the markets as a science & they apply hard core & proven formulas to making money & especially the timing applied to the act of selling.
But the average investor views the stock market as magic. And when hard pressed to apply science to investing they will instead believe in magic.
And what is the magic believed by the average & common investor?
He or she believes that if they just hold an issue long enough it will continue to go up & they have all the time in the world to sell & collect their profit. A profit that they tell themselves they can’t collect now anyway because they’ll then have to pay taxes so let’s wait until our retirement before we sell.
The average investor views his stock portfolio as a bank account with a fixed value which it is not.
And most analysts happily foster this magical mode of thinking. Very few money managers will ever strongly suggest to any investor a solid selling strategy. At the most you will read vague references from time to time that maybe now you should take some profits.
Yes, do you remember hearing this over & over? “Take some profits.” But how much & exactly when? You will never hear this type of concrete information provided by anyone.
To be given the advice to “Take some profits” is too vague & not specific enough.
Investors need a defined formula that is fixed & determined by the laws of prudence & practicality. And a formula for selling must be learned & cultivated if you are ever to learn to consistently make money over & over & to lock in profits.
Any of you ever like to go down memory lane?
I have been reading about the very successful businessman who became a multimillionaire from the invention & successful marketing of the Erector Set. Remember the Erector Set 40 years ago?
Now that we are coming into the holidays with Christmas getting closer & closer lets take a step back in time to remember one of those old toys that we used to see in Christmas past.
“AC Gilbert made more than toys. He manufactured future engineers & scientists.”
“In an age when learning was by rote, Gilbert encouraged children to make up their education as they went along.”
“Between 1913 & 1966, Gilbert sold more than 30 million Erector Sets, earning its nickname as “the world’s greatest toy.” But it’s hard to consider it a toy. During the late 1920s the top-of the-line Erector Set, packed in a wooden box two & a half feet square & eight inches thick, weighed 150 pounds & made hundreds of models, including a five-foot-long zeppelin & a four-foot Hudson steam locomotive. The set sold for $70, a month’s wages during the Great Depression.”
“But above all, AC Gilbert made memories.”
“Today’s most popular toys - even those for thirteen-year-olds – are pure fantasy. But time was when toys were mock-ups of the grown –up world, preparing children for it day by day, doll by doll, model by model. When a society is in sync with its toys, children are not afraid to grow up, and those who come of age with such toys can look back & see the person they’ve become in the toys they once loved.”
The Man Who Changed How Boys & Toys Were Made, Bruce Watson, 2002
Does the following statement accurately describe our sons?
“From Cain’s slaying of Abel to the adventures of Huckleberry Finn, boys heard the call of their parents but heeded the call of the wild.” The Man Who Changed How Boys & Toys Were Made, Bruce Watson, 2002
And does the following best describe our sons as they enter adolescence?
“Of all the animals the boy is the most unmanageable,” Plato…”
At the turn of the century in 1900 our nation’s sons & future leaders were exploited in masse by the Industrial Age of the 19th century.
“At the turn of the century, being a boy was hard work. The only tougher job was being a man, yet manhood came at an early age. Men worked twelve-to-fourteen hour days. So did boys, some as young as ten or even eight years old. From old photos taken in sweatshops, coal mines, and mills, their grimy, leaden faces still accuse us.” The Man Who Changed How Boys & Toys Were Made, Bruce Watson, 2002
AC Gilbert helped to prepare our nation for the challenges of the then new 20th century by creating educational toys that helped to inspire & mold our nation’s future engineers, scientists, computer geeks & future “Bill Gates.”
Comments?
Subscribe to Gold Letter Alert!
Subscribe to the Gold Letter Today!
