SPROTT’S THOUGHTS | Goals vs Dreams

Some speculators treat gold stocks like lottery tickets.

  • Smart investors have financial goals and fit gold stocks into their portfolio.
  • A goal must include a plan, not merely a hope such as gold going to $2,000 per oz.
  • Prudent investing requires work, not just hoping and waiting.

 

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Some speculators approach investing in gold stocks like buying a lottery ticket. A smart investor, however, should have a sound financial plan complete with objectives, goals and practical milestones. Investors should avoid selecting any financial instrument based solely on the asset hitting a predetermined price. A prudent investing strategy includes research and experience — not just hoping and waiting for “The Big Win.”

“The risk of paying too high a price for good-quality stocks – while a real one – is not the chief hazard confronting the average buyer of securities.” – Ben Graham.

It might have been my dream to become a professional athlete, but was it my goal? Did I do everything in my power – training, diet, coaching, etc., to get there? Sure talent can go a long way, but you still need dedication and a plan.

Concerning money, is it your dream to make a lot or do you have financial goals? Winning the lottery is a dream, as is getting a ten bagger. Formulating a plan and objective for your money is a goal. If a stock rises 5% the day after you buy it and goes on to double and triple, you may have made a good decision. However, if you wait for the ten bagger as it dips into negative territory, you are focused on a dream.

A proper plan considers the reason you are buying the company, the catalyst for growth, the rate of return and the exit plan. These objectives should be realistic — a goal of 100% growth per year is a dream.

Following the last cycle, investors might benefit by inspecting their portfolios for evidence of dreams. Did you take advantage of drastic moves by selling on the way up? Did you buy quality companies as their prices dropped? Is your mining portfolio littered with well-promoted, but under-achieving, names that wrote off billions in assets and took on billions more in debt?

Goals require time and hard work. Have you downloaded the company’s latest annual report or presentation? Have you met personally with management? Have you educated yourself in geology and conducted a deeper dive of the orebody?

You must consider all of the above factors and others to properly evaluate an asset and understand the value, rather than the price, of a company.

RUMORS VS. KNOWLEDGE

Rumors are “tips” received by friends or newsletters. Understanding the research, if any, that supports the “rumor” is paramount. With the addition of research and investigation, the rumor becomes knowledge.

In the mining industry, knowledge is widely dispersed and constantly generated, typically through the drill bit. This can create opportunities through inefficient pricing.

Consider the diagram below. How should one value the associated company?

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Cross Section Drillhole Intercepts From Asset of Junior Mining Company, Source: Sandstorm IR Presentation, Date: April 2018.

The investor should consider how the data is being interpreted and by whom.

The idea of 50 meter width of 5 grams/ton gold might be exciting, but is it “drill width” or “true width?” Furthermore, how likely is this geology to continue? The answer can be the difference between a project with economic potential and a worthless lottery ticket.

As another example, suppose a widely owned company includes a small note in the back of their quarterly earnings report about metallurgy or geological problems. To the untrained eye, it might be just another note with no cause for concern. However, a trained geologist or metallurgist would recognize the issue and potential risk associated with the note.

The quality of the geologist is, perhaps, the most important factor when discriminating between winners and losers.

PROBABLE VS. POSSIBLE

Numerous studies show that emotions get in the way of logic. Individuals are notoriously bad investors because of emotion. The financial services research firm Dalbar runs a study of this each year.

Below is a comparative chart of two major producers since 2011. One is a widely owned “under-performing” name whereas the other is a much less owned “quality” name.

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Stock Performance of Two Major Gold Producers From April 2011 to
Present, Source: Thomson Reuters Eikon, Date Accessed: April 9, 2018.

Of the two companies, one had zero write-downs of assets through the bear market whereas the other had write-downs in the double-digit billions of dollars. One had a ROIC of 10% while the other destroyed capital. These criteria are one way to measure quality.

“Chief losses to investors come from the purchase of low-quality securities at time of favorable business conditions.” – Ben Graham.

Graham’s words help us understand why the underperformer is more widely held. During the bull market, many investors piled into the sector and held their positions as they continued higher, choosing not to lock-in their gains. In the excitement of the bull market, they lost control of their emotions.

If you have goals for your money, you might benefit by focusing on company quality based on specific metrics. Planning for more than a gold price of over $10,000 per oz. (a dream) would be prudent for those with goals.

 

Questions or comments? Contact the author here.

Sprott U.S. Media, Inc. is a wholly owned subsidiary of Sprott Inc., which is a public company listed on the Toronto Stock Exchange and operates through its wholly-owned direct and indirect subsidiaries: Sprott Asset Management LP, an adviser registered with the Ontario Securities Commission; Sprott Private Wealth LP, an investment dealer and member of the Investment Industry Regulatory Organization of Canada; Sprott Global Resource Investments Ltd., a US full service broker-dealer and member FINRA/SIPC; Sprott Asset Management USA Inc., an SEC Registered Investment Advisor; and Resource Capital Investment Corp., also an SEC Registered Investment Advisor. We refer to the above entities collectively as “Sprott”.

The information contained herein does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation.

Forward-Looking Statement

This report contains forward-looking statements which reflect the current expectations of management regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as “may”, “would”, “could”, “will”, “anticipate”, “believe”, “plan”, “expect”, “intend”, “estimate”, and similar expressions have been used to identify these forward-looking statements. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this document. These factors should be considered carefully and undue reliance should not be placed on these forward-looking statements. Although the forward-looking statements contained in this document are based upon what management currently believes to be reasonable assumptions, there is no assurance that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this presentation and Sprott does not assume any obligation to update or revise.

Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any fund or account managed by Sprott. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any fund or account managed by Sprott will be invested.

Past performance does not guarantee future results. The views and opinions expressed herein are those of the author’s as of the date of this commentary, and are subject to change without notice. This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

 

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