-- Posted Thursday, 11 October 2012 | | Disqus
Source: Alec Gimurtu of The Gold Report
The major financial markets are dominated by large funds that behave like lemmings—follow the herd and suffer the consequences. Investors should not fall for the commonly held myth that all professionals have an edge over smaller institutional and individual investors. In this exclusive Gold Report interview, Roger Wiegand, editor of Trader Tracks Newsletter, discusses the criteria he uses to select the best mining and exploration companies. He then explains how moderate trading within a mostly buy-and-hold portfolio can lead to superior returns without the downsides that lemming behavior can cause.
The Gold Report: We are going to talk about "lemming investing," the theme of your most recent newsletter. Who or what are lemmings and how does their behavior drive the market?
Roger Wiegand: The lemmings that drive the market primarily are the big funds, typically mutual funds that manage 401(k) and individual retirement accounts. Most of those funds are set up on a buy-and-hold basis. There are hedge funds with lemming behavior as well, but the hedge funds are more often traders. They are creating a track record of lemming investing as well because of their huge size—billions and billions of dollars. The other sector of the market is the retail investor, with approximately 30% of the market.
The lemming investor market would be most all of the funds and all of the smaller investor's money. The large funds primarily invest money for the smaller investors (being the lemmings). They really control what's going on, and they compose 70% of the market. And they do, in fact, establish the trend. Non-lemming investors are those with large accounts who trade for their own pockets and the pockets of the seven figure and larger trader/investors. This is the sector leading/driving the market with mutual fund managers investing lemming money.
TGR: In your recent newsletters, you discuss commonly held investment myths. Near the top of the list was that the largest "professionals" always have special insight unavailable to smaller professionals and individuals. Is that what you're stating here?
RW: That's correct. The reason we wrote the article about the lemmings is that we think the old paradigm of buy and hold forever is not a good way to go. That's not to say that you can't buy stocks and hold them for an extended period. What we like people to do on our recommendations in our Trader Tracks Newsletter is to purchase stocks on a buy-and-hold basis and then trade in and out up to twice a year based upon the two annual cycle changes. One of those, of course, would be to sell in May and go away. The other would be the re-entry after the summer, but then you have to deal with the September-October period when the stock markets tend to have a risk of large corrections. We called the correction this fall, and we hit it right on the day. We said it would be on Sept. 24. It was a mild correction. In other words, the buying stopped, and prices fell a bit.
The presidential election is interfering with market direction right now. People are confused as to what may or may not happen. We have the overriding negative problems of a slowdown in Asia, a major slowdown in Europe and a mild slowdown in the U.S. The U.S. broader stock market has generally been holding up pretty well. We think that it will be propped up and levitated at least until the voting is over on Nov. 6. After that, reality may hit home in many markets depending upon who is elected president. I don't think it realistically matters in the short term in any way, except for the psychology of the market. While there will clearly be an impact, it is not clear what that impact will be. Wall Street favors a Romney election but historically the markets have done better after a Democrat has been elected. This time is indeed different on numerous factors.
Resolution of the European debt situation is also adding to the overall market indecisiveness. Spain and some of the other neighboring countries have serious problems and we don't fully know how bad is bad. Since we talked on this interview, new meetings and media outflow from Europe tell us they are frightened and afraid to remark on the true status. However, the International Monetary Fund stated a very dire warning on Oct. 8, 2012, using the word "alarming."
TGR: So the lemming behavior you're witnessing now is that the larger funds deploying capital are ignoring or glossing over the major macroeconomic problems worldwide?
RW: The big players understand fundamental problems, but they also have so much power that they can move the market, for example, by buying the S&P 500 for market support. Other strategies they use to keep markets artificially high include not selling off entire positions or very selective selling of the weakest issues. The funds can also protect long positions by buying put options. They have been doing this for years and have a lot of computing power to back up their analysis. For example, if they felt the market was going to sell off 10% in October, they would want to buy options to the extent they could cover themselves on just that 10%. That sounds like a lot of money, but it's not really because the puts are leveraged. This is like buying an insurance policy to protect the overall investments.
TGR: You advocate a "modified" buy-and-hold strategy to your subscribers. That is, a traditional buy-and-hold strategy with seasonal trading. Does that mean you are biased toward the long side with minimal short exposure?
RW: That's correct. We like to trade. We trade both stock and futures, and we prefer the long side. Occasionally, we will short. Our short trades haven't been bad, but they haven't produced the kinds of returns we have gotten on the long side. Our strategy is focused on the long side. When we see downside pressure coming, we recommend put options, profit taking and scaling back positions to reduce exposure and lock in profits. Once the correction is done, we go back in and buy.
TGR: This month's newsletter had a multi-decade chart of the Wilshire 5000, which you called bearish. Are you negative on equities in general?
RW: The Wilshire is getting near a peak, and that chart is a very long (yearly) chart. I prefer to use monthlies for the big picture. The monthly is telling us we have a bear market in front of us. The question is how much of a bear market is it? I'm not totally against stocks, but our preference is in precious metals and energy stocks, as well as some currencies. I believe we are in a rotation away from junior stocks and moving toward intermediates. That doesn't mean there aren't good juniors out there. We have many good juniors in our newsletter and on our list, and we do prefer them. But we also suggest that people trade them and be very selective.
TGR: What is your strategy with juniors?
RW: We look for the junior explorers with these criteria:
1) Superior management.
2) Well financed. (Juniors in the fall of 2012 need to be well financed because if a junior company has to go back into the market and raise more capital, it could be vulnerable.) If it's sitting with enough cash to work with a burn rate that will help it manage the business for two or three years, I think it is going to be in good shape. We have several stocks in that category in the newsletter.
3) Good geopolitics and geography. We've gotten very selective about geopolitics and geography. There is much of the world where we prefer not to go anymore. We currently favor most of Canada, part of Alaska, northeast Nevada, and we like Mexico. It is a relatively short list.
4) Proximity to a major operator. This is really important. If you're going to hang on to a junior stock and a company follows the rules, we really prefer that it's sitting next door or in close proximity to a senior miner that's in operation. Mine building is tough work. It is best to follow a successful company that has worked out the infrastructure and politics. We all know what's happened to the cost of building mines and infrastructure over the last 6 to 12 months. One of my suggested companies had an initial estimate of $95 million (M) to build its mine. It went back and reconfigured it—then all of a sudden $95M became $440M. That's a drastic increase due to inflation, availability of money and many other factors. If you have the first three criteria worked out, this point becomes critical – you need an obvious buyer for that property. We have had several examples of this situation that have worked out quite nicely.
TGR: Having a built-in exit strategy for a junior is a great way to cap off a winning investment. How about entry strategies? Are you more interested in silver or gold at present?
RW: We like both. From a futures trading standpoint, gold may be easier. However, given the high gold to silver ratio, there is probably more upside in the silver market. For stocks, there are a lot of companies to choose from. Because we spend a lot of time analyzing these companies, we are comfortable recommending silver juniors for greater leverage. But we have some gold companies that are doing exceedingly well, too.
TGR: Regarding geopolitical risk, overall, Canada is a low risk jurisdiction, but portions of British Columbia might be riskier than some people are comfortable with. Is the political climate of B.C. better than most investors think?
RW: I think that the question about having problems with political situations was more of a concern in past years, maybe even as recent as a year or two ago. But a lot of that is starting to fade away. I think much has to do with the fact that communities are looking for jobs. The mining industry is labor intensive. Consequently, if they can start up a mine and be successful, it's a real plum for the local community economically.
TGR: Do you want to summarize what you think investors should keep in mind when they're trying not to be lemmings?
RW: One important consideration investors need to keep in mind is the volume of trading in juniors. If you're going to sell, you're going to have to sell into strength. If you wait for a peak in gold or silver, you may not have many buyers for a junior mining stock. With certain juniors, you want to buy and hold, knowing full well you could get a 50% haircut, but then it will turn around and go right back up again. The other thing is if you buy the stock and you make a triple and you see a correction coming, it may be a good time to go in and take all the money off the table. There are also individual tax questions, and variations depending on the specific company and position, but you get the idea.
I'm very wary of the broader stock market for this fall for at least a -20% correction. After the election, we could encounter some very serious problems in credit and in stocks worldwide. It's no secret that some of the very wealthy people, the billionaires, are selling millions of shares of general market stock right now. Some of them have been interviewed to the extent they're afraid of another 1929 event. Nobody can really call that for sure, but as a technician, I see the charts are looking like a markets sell-off after the election. Regardless, if an investor follows a well thought out strategy of stock analysis with occasional trading, that investor will outperform the large number of lemmings over time.
TGR: Thanks so much for your time.
Roger Wiegand—aka Trader Rog—produces Trader Tracks Newsletter to provide investors with short-term buy and sell recommendations and give them insights into political and economic factors that drive markets. After 25 years in real estate, Wiegand has devoted intensive research time to the precious metals, currency, energy and financial market for more than 18 years. He is a regular contributor to the Korelin Economics Report.
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-- Posted Thursday, 11 October 2012 | Digg This Article
| Source: GoldSeek.com
