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“The Rules of Investment and Speculation”

 -- Published: Thursday, 3 April 2014 | Print  | Disqus 

By Tony Locantro­­­­­­

 “At the start of the bull market we have all the paper and they have all the money. At the end of the bull market we have all the money and they have all the paper”.


Regardless of the number major “booms” and devastating “busts” the majority of investors/speculators are normally wrong in the end. History has provided us with valuable lessons, yet the key emotions of fear and greed combined with a dose of stupidity create extreme volatility in both directions and opportunities for those not swept up in the herd activity.


In the “social media” age we are literally now bombarded with conflicting messages, calls and sales pitches from a variety of marketing geniuses, self-proclaimed gurus and those simply looking to milk your wallet even further. I admit to being part of this epidemic from being a content provider in a world now drowning in content. Let’s face it the majority of “Tweets” these days will have all the longetivity of a male orgasm (unless your Justine Sacco), yet I can see some major issues ahead in the next “speculative bubble” which will be the first where rumours and Figjam will spread to thousands of people instantaneously via the little blue bird. As FOMO increases as with any bubble, you will see traditional blue chip investors swept up in the mania holding a portfolio of rubbish on margin.


Apart from speculative bubbles, the other danger to investors/speculators is too much information or TMI as many parents of teenagers would hear often. The three books I strongly recommend to my subscribers (along with Don’t Sweat the Small Stuff by Richard Carlson) are at the bottom of this article, however Bob Farrell’s 10 Market Rules to Remember are well worth expanding on and adding a more “speculative” feel to them. (Please note readers are welcome to take an obligation free trial to my newsletter at the end of the article)


Bob Farrell commenced his career at Merrill Lynch in 1957 following a period of study under the great value investor Benjamin Graham at Columbia University. In 1967 he became Chief Market Strategist (1967-1992), and remarkably prior to that for 16 of the 17 prior years he was the top ranked Wall Street analyst in predicting the direction of the stock market. His 10 Market Rules to Remember were published in 1992.


1: Markets tend to return to the mean over time.

The best measure of this on a broader basis would be the historical PE ratios for the S&P 500. There will be periods (sometimes protracted) where stocks are either undervalued or overvalued, however the risk/reward profile of buying equities during periods of undervaluation is much more attractive than rampant enthusiasm at/or near the top. Jordan Eliseo, Chief Economist for ABC Bullion recently presented a compelling case that equity valuations are “stretched” and this apparent in the slides below. (Jordan sourced the figures from Schiller Data).


For the junior resource/precious metals investor in Australia, the Small Resources Index (XSR) is a fantastic barometer of value and sentiment, and based on a 72.5% decline from January 1 2011 to June 25 2013 it could be argued that the risk/reward of accumulating quality juniors remains extremely attractive. The XSR has been >6000 in both 2008 and 2011 yet at the time of writing was a measly 2129. Whilst it doesn’t mean that the index will roar ahead and surpass these levels in the short-term, it should provide some comfort for those contrarians happy to go against the herd and buy when others are selling.




2: Excesses in one direction will lead to an opposite excess in the other direction.

Unless you believe that “Mining is finished, and resources are dead”, there is an extremely compelling case that interest in base and precious metals equities will eventually return and overshoot to the upside. The downbeat attitude has been exacerbated by three horrific years illustrated by the XSR below, however those who believe that “Mortgage rates or junior resource stocks will never rise again” I believe could be in for a nasty shock. Sure the catch phrase emanating from China is all about the looming “Dining Boom” as opposed to the stuttering “Mining Boom”, but last time I looked we still need copper, nickel and zinc to build stuff whilst gold has been around for a mere 5000 or so years and I don’t see it going away anytime soon.


XSR 10 Year Chart: Source Iress


3: There are no new eras – excesses are never permanent

If this were the case we would all be wearing stonewash jeans and Hypercolour tee-shirts, whilst attending to our tulips (or tip-toeing through them). One of the greatest catch phrases of recent times was “The new economy” and whilst there are always a handful of companies that “survive and thrive” every boom is littered with pretenders, transformers and speculators obliterated through their own greed and stupidity. I enjoy the convenience of my 1kg Ultrabook, yet my major concern when working remotely from a local café is the availability of a power point as the advances in battery technology have failed to keep up. It isn’t all bad news though, as having your phone well into the red zone out on a night out with your mates can be a good thing provided you have access to a taxi rank.


Despite all the lessons in history we are still going to fall for the next major “fad” and declarations of a “new era”. How often do you here school yard chatter about the investor whose ancestors sold out at the top of the tulip, railroad and electronics bubble, whilst his timing in tech, retractable syringes, childcare, uranium and Steve Madden shoes was impeccable?


4: Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

Who would have thought that Fortescue Metals Group (FMG) would rise from 9c to a high of $136 (still trading around $53 eqv) or Paladin (PDN) roar from 0.008c (eight tenths of 1 cent) to an all-time high of $10.80 in April 2007? When you are in depressed market you tend to believe that every upward price movement is all you are going to get and this is why many junior resource stocks are now struggling after a 30-40% bounce. The great precious metals stock bubble of 1978-1980 is long forgotten and speculators are now satisfied in selling a chronically undervalued gold junior for 5.2c after acquiring the shares for 5c. Buying at the top of a bubble will lead to similar results but in reverse. Bad news takes time to be digested amongst larger investors, and whilst daytraders will move in and have their fun, the risk/reward of catching a falling knife is one or two price steps up for a 100% wipe-out should the company be suspended never to return.


I can assure readers that stupidity to the upside will return to the junior resource sector and once paranoia is replaced with reality you will start to see a number of quality juniors trade around their rightful intrinsic value. Major mineral discoveries in Australia tend to be as rare as a three-star Adam Sandler movie and he is about due”


5: The public buys the most at the top and the least at the bottom.

Ever seen a Boxing Day sale where ladies fall over each other to buy shoes 700% more expensive than the previous week? This is the beauty of the stock market where contrarians are able to buy stocks cheaply (often on their own) that have thrown up a technical sell signal or whose market depth is as attractive has a taking a dip in a brown tinged ocean. It all gets back to fear, greed, the fear of missing out (FOMO) and ultimately stupidity. It is a lonely place buying at/or near the bottom, whilst you are likely to be ridiculed for taking profits in a stock that is heavily discussed on the financial forums and invites are already been sent out for the $5 party. Positive feedback is what drives markets higher and until that hairdresser, cobbler, baker or taxi driver starts making regular risk free profits the general public are still miles away.  


6: Fear and greed are stronger than long-term resolve.

During the Dotcom bubble I remember clients buying a stock at 10c then becoming over anxious when it dipped to 9.5c or failed to move in an immediate time frame. With investors/speculators now drowning in TMI, we have concerns over Crimea, China, interest rates, employment numbers, European growth rates, and a potential short-term oversupply in copper which all create “fear” and “anxiety” and cloud our longer-term judgement. When stocks start to run and we start high-fiving fellow investors, the lessons learnt during bear markets are thrown out, with many rushing into leveraged and exotic products to “turbo charge” their gains. This pattern of greed and stupidity will then repeat itself with new themes, stock promoters and eager participants waiting to part with their money.


7: Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.

Junior resource/precious metals investors will know all about this. The ASX 200 has enjoyed a stellar rally which has been the result of strong gains in the banking, telco and industrial sectors, yet apart from a number of high-growth opportunities it has been tough going in the smaller caps and in particular the miners. With the average PE ratio of the S&P 500 around 25x (as per previous slide) it could be argued that there has been some strength in the broader US market, whilst the Australian market is now dominated by the so-called “Yield chasers”


8: Bear markets have three stages - sharp down, reflexive rebound and a drawn-out fundamental downtrend.

The XSR chart from January 1 2011 (above) would highlight this perfectly. It has been an extremely challenging market for junior resource investors and apart from the odd major discovery or “fad” commodity, even the highest quality explorers and/or emerging producers have struggled for traction.  This had led to issues in raising capital and has seen a number of miners enter administration and liquidation. There have been some positive signs emerging of late with stocks getting a “sugar hit” from newsletter recommendations and daytraders keen to pursue bio/tech and resource trading opportunities and stocks putting on some impressive gains albeit from a low base.


9: When all the experts and forecasts agree - something else is going to happen.

Just when gold was going through $2,000 in 2012 like a dodgy vindaloo the price corrected and now we are faced with a mixture of both bullish and bearish calls. Just as major banks and forecasters upgraded their iron ore price targets we copped a nasty near-term correction. The most worrying call for the “Mortgage belt” is that interest rates are going to remain at record low levels for the foreseeable future and house prices will continue to rise due to high demand and low supply. Leading up to the GFC we were being led to believe that the market will continually rise to the overwhelming support from super fund inflows. I am sure that 35 out of 27 economists will be picking the next “Recession Australia had to have”.


10: Bull markets are more fun than bear markets.

I am guilty of overusing the following saying “If it flies, floats or f….., rent it” Bull markets are great fun where we all go out for long lunches, fight over the bill then normally end up at the casino or disco thereafter. Despite all the pain of previous bubbles, many continue to purchase “illiquid” assets or tax deductions such as luxury cars, boats, a nightclub, restaurant or sporting team (for the super successful) from a major liquidity event. The other major mistake many make is to re-invest profits in stocks heading south and fail to put any away for the tax department. Whilst the intention to squirrel away profits in cash, industrial stocks or precious metals is a noble one, boredom quickly sets in and portfolios are then decimated to chase the “effluent” that normally flows and runs much faster. The real test will now come from the “Buy and hold” investors who have done extremely well from doing nothing, but may start to fall into the temptation of chasing a little more excitement. Whilst bull markets lead to us feeling wealthier, part of a crowd and more attractive to the opposite sex, for the uneducated, fearful, greedy and stupid they are the worst events that could possibly happen to the individual and their families. There is a horse race or Keno game being run somewhere, it doesn’t mean you spend all night at the casino or an on-line betting site.


The three most costly words for many of us are “I love you”, however “This time is different” is often regarded as containing the four most expensive words in financial history. Bob Farrell’s “10 Market Rules to Remember” are essential reading for investors across all asset classes, yet are often discarded at the first sign of a major bull market, era or paradigm as we all become self-proclaimed gurus and mistake a bull market for brains.



Tony J Locantro




For a free trial without obligation to Locantro’s Life please visit




1: One Up On Wall Street, Peter Lynch


2: The Winning Habits of Warren Buffett & George Soros, Mark Tier


3: Devil Take The Hindmost A History Of Financial Speculation, Edward Chancellor





The three books at on 4th March 2014 cost a total of $56.57 (with free postage)


About the Author: Tony Locantro is the Managing Director of Locantro Capital Pty Ltd, Locantro Asset Management Pty Ltd and Gold Australia Pty Ltd. He entered the stockbroking industry in 1998 and was an Associate Director at Patersons Securities Limited until 2010.  In 2001 he authored The Green Room: A Guide to Speculating on the Australian Stock Market and is the current author of the newsletter, Locantro’s Life. He has been quoted extensively in the financial press, hosts and is a keynote speaker at a number of industry events, has written articles for Kitco and other websites and also appears as a regular panellist on Your Money Your Call (Sky Business News). He is known as a passionate and respected supporter of the junior resource industry.


Disclosure of Interest: Tony Locantro, his companies, employees and associates may have personal interests in the majority of the companies or sectors covered in this article.


Disclaimer: This article is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular reader have not been taken into consideration. Individuals should therefore discuss, with their financial planner or adviser, the merits of each recommendation for their own specific circumstances and realise that not all investments will be appropriate for readers.




Tony J Locantro                

Managing Director                                                                            

                                                                                                  Phone: (08) 6142 6724

Gold Australia Pty Ltd                                                                                            Fax: (08) 9470 3051

PO Box 635                                                                                                   Mobile: 0402 604 862   

Victoria Park WA 6979                                                                                           Int’l: +61 8 6142 6724



Locantro’s Life is designed for speculative investors. Subscribers should ensure they consider their risk profile as speculation is the highest risk investment.

Please note

This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without prior approval.


Locantro’s Life is a publication issued by Gold Australia Pty Ltd (ACN 131 793 416) who is an authorised representative of AustAsia Financial Planning Pty Ltd AFSL 229 454. Gold Australia Pty Ltd has made every effort to ensure the reliability of the views and recommendations expressed in Locantro’s Life.

Gold Australia Pty Ltd research is based upon information known to us or which was obtained from sources which we believe to be reliable and accurate at time of publication. However, like the markets, we are not perfect.  Locantro’s Life is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular reader have not been taken into consideration. Individuals should therefore discuss, with their financial planner or adviser, the merits of each recommendation for their own specific circumstances and realise that not all investments will be appropriate for all subscribers. To the extent permitted by law, Gold Australia Pty Ltd and its employees, agents and authorised representatives excluded all liability for any loss or damage (including indirect, consequential or special loss or  damage) arising  from  the  use of, or reliance on, any information with Locantro’s Life whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Gold Australia Pty Ltd and AustAsia Financial Planning Pty Ltd hereby limits their liability, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.

Disclosure of Interest Gold Australia Pty Ltd, AustAsia Financial Planning Pty Ltd, its Directors, employees and consultants may have personal interests in the majority of the companies covered in this report (both direct and indirect).AustAsia Financial Planning Pty Ltd (AFSL 229454) Level 1 AustAsia House, 412-414 Newcastle Street, West Perth WA 6005 Phone: (08) 9227 6300, Fax: (08) 9227 6400

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