I have made a lot of money for a lot of people over the years. Despite meltdowns, mistakes, and great big grizzly bears, my past track record averaged 18.5% in annual gains. How did I pick so many winning stocks?
I’ll tell you.
But first, I should say that I decide on what I want to invest in before I even think about which stocks to buy.
What do I mean by this?
I’m always watching the world, the geopolitical dance, technological changes, consumer trends, markets, assets—as much as my brain can absorb. In principle, I’m willing to speculate on anything I can see having extraordinary potential with reasonable risk.
Once I know what kind of opportunity I want, I start looking into specifics. And that can change. I don’t just blindly follow some course set in stone. I define what I’m looking for under current market conditions—and keep checking those conditions in case they change.
Right now, in the resource sector, I’m looking for advanced exploration plays and first-time mine builders. I’m not looking for early stage exploration. Nor am I interested in producers (which will likely deliver less to the bottom line for the current quarter, driven by lower metals prices). I’m working my way carefully into other markets as well, but in the resource sector I know best, I’m buying while prices are down.
You can and should decide on your own priorities. Only you can determine your own appetite for risk. Only you can decide if you want to focus on wealth creation vs. wealth protection.
Whatever you choose, it’s important to know what you want to invest in. Then be disciplined about sticking to your guns. If nothing else, it narrows the field of potential targets and makes it easier to conduct the due diligence sound decisions require.
The 5 Ps
Once I do determine the type of company I’m looking for, how do I evaluate the candidates and decide what action to take? I have a method, adapted from my mentors years ago and honed over decades of cumulative experience. It boils down to five essential steps.
We could call it the 5 Ps…
It may seem that it goes without saying that bad apples should be avoided. But it’s always worth stressing fundamental truths: integrity matters.
Many investors start with the latest exciting press release, or the wonderful description of how the company’s activity will make them rich. If they bother looking into management at all, it’s often only as an afterthought…a reluctant nod to due diligence.
I dig into management before I do anything else. I discovered early on that the wrong people can screw up the best ideas, projects, and business plans.
Having been actively involved in the resources sector for a long time, I have a list of people who have lied to me over the years. My list of actual criminals is, happily, rather small. I have a much larger list of people who may be sincere, but have a track record of sending shareholder money to money heaven. Before anything else, I look to make sure the fate of my investment does not rely upon such people.
I also have a list of those who’ve delivered for shareholders multiple times, of course. That’s a huge plus, right out of the gate.
But even I don’t know everyone in the markets I’m interested in, so sometimes I have to do more research. Usually, that involves reaching out to people I know who worked in companies I see listed as past experience of the management of the company I’m researching. I know people who’ve worked in every major mining company in existence. That helps me check up on claims others make about their track records. And, of course, I always grill management. I ask hard questions and evaluate not only the answers given, but the way the answers are given.
A simple and powerful tool anyone can use is Google. These days, it’s easy to search for the history of company executives and see if there’s a trail of value added and success—or problems, lawsuits, and failures.
Another powerful set of free tools are the archives of corporate filings that regulators of public companies maintain. That’s EDGAR in the US and SEDAR in Canada. Paper may not seem like a people thing, but a paper trail can tell us a lot about management’s priorities, history, and effectiveness.
You can use all these public sources too, but it takes time and diligence. It’s work, I understand. But I don’t expect to make money without working.
Bottom line: I absolutely must have confidence in the people I’m trusting with my hard-earned money, or I go no further.
This refers to the technical merit of the play. It could be the rocks in a mineral exploration play, the processing plant of a mine, or whatever the company is working on to add value for shareholders.
That covers a lot of ground. My history and specialty is evaluating mineral projects, about which I could write a book—and someday I will, because it’s a book that should be written. But if I tried to give you a quick checklist of critical points to look for, say, in just exploration plays, it would not fit all situations. Frankly, it would likely lead you astray. As for all the investments we might make in different sectors, it’s well beyond the scope of this article.
Nevertheless, Property is central to any investment, in any sector. This is so obvious—and compelling—many investors start here. This is understandable, as it’s what defines the “value proposition” we’re here for. But it’s a mistake. That’s not just because the wrong People can screw up the best Property, as above. If we start with the Property, and the case is very compelling, we can get so excited about its prospects that we lose objectivity when evaluating the People or Problems it might confront.
Better to disqualify an opportunity before we can fall in love with it.
Once I’m sure the People are up to par, then I dive into the Property—and so should you. You should study it until you understand it. Even if you don’t have the background to verify all the details, the whole should at least make sense to you. If it doesn’t, keep digging until it does. If that means you miss an opportunity, don’t fret. There will always be another. Better to miss an opportunity than to lose money on something you should never have gotten into.
One more point: as many years as I’ve spent analyzing and investing in resource companies, I don’t pretend to know it all. When I encounter something I have not seen before, I consult with experts in that area in my personal network. I’ll hire an independent consultant, if necessary. You can hire me, of course, but you can also develop your own network. That’s one reason to go to conferences and meet with companies in fields you’re interested in.
Once I understand the Property I’m considering betting on, I dig into all the things that can go wrong. I dig as hard as I can. The list of possible problems is infinite, but as a starter, it includes:
Overall, the problems an opportunity may face come down to estimating odds. If my due diligence reveals a fatal flaw, then my decision is easy: I don’t buy in. But if there are only potential problems, I need to estimate the odds that they will become actual problems. And then I want to know what the odds are of the company solving the problems if they occur.
This may be the hardest thing for an inexperienced investor to deal with. It’s certainly why I move slowly into new areas. I don’t want to risk my money—or my readers’ money—until I’m highly confident in what I’m doing.
I’m sorry to say that there’s no good short cut. You can read books and articles like this, but they can only take you so far. At the end of the day, there is no substitute for experience.
The good news is that we all gather experience as we go. Anyone can get serious about amassing it with a simple decision to do so. If you’re reading this article, you’ve started already.
Once I know I’ve got great people advancing a value-adding property, with no major problems on the horizon, I want to know what’s going to happen next.
I want a good story. I want to know it will be told well and to as many investors as possible. (Even great stories don’t tell themselves.)
Put another way, I ask: “Why should I buy this now?”
Even though everything else about an opportunity is great, if nothing material going to happen for some time, the answer may be, “I should wait.”
A common example of this in my experience is when a mineral exploration company makes a discovery and shows that it has great economic potential, but then has to spend years pursuing permits before a mine can be built. Even if nothing else changes, the shares are likely to fall simply out of shareholder boredom.
But even if that doesn’t happen, why should I park my cash in shares that aren’t likely to rise soon? There are always plenty of others with more immediate upside.
The only time I might do this is if I quite sure an underlying asset value is likely to increase. If I’m convinced, for example, that uranium is about to go through the roof, I might buy a solid uranium company whether or not it has material news of its own on the way. But this is rare. Even when I’m certain an asset price is about to increase, I’d rather have the leverage of a company delivering important milestones on top of that increase.
This is why I always ask management about the deliverables ahead. I ask about time frames. I want to know what they will do to promote their successes.
Without good answers to these questions, I’m not likely to invest.
My thinking about Price has to do with building my bids. I look at the price action in the market sector or commodity or asset. I look at the price action in the specific shares I want to buy. I don’t try to time perfect bottoms, but I do look for price fluctuations to give me the best entry points I can get.
At this stage, I also consider that a low price—especially a low stock price when the underlying asset price is increasing—can either be an opportunity or a warning. If something looks incredibly cheap, I want to go back to the potential problems and make sure I haven’t missed anything.
Assuming the speculation still looks good, ideally, I want a situation when markets have overshot and prices are much lower than my valuation of what I’m buying.
If something is already on a tear but I am sure it’s headed much higher, I might be more aggressive in my buying. But even then, I always check the bid-ask spread and bid at or just below the current range of trading.
If something I’m sure I want is falling hard, I place stink bids that I’d be happy to see filled, regardless of what happens next. If they don’t get filled, I look for the stock to stabilize, and then bid more aggressively under market.
As you can tell from the above: I always place limit orders.
Some day, I’ll write another book on trading. For now, the key point is that by watching relevant price action, I can get better entry points. It takes discipline to set my price and wait for the market to come to me, but it’s how I maximize gains.
In sum, whatever a company is doing to make my shares go up, I need to understand it and have confidence in it before I invest. If the 5 Ps don’t check out, I don’t invest. That same would apply in any sector I invest in, not just resources.
Past performance doesn’t guarantee future results, of course, but this discipline is what enabled me to beat the market so consistently, resulting in the 18.5% average annual gains mentioned above. People say that such “luck” is what happens when preparation meets opportunity. That’s true, but it also requires patience and discipline.
Hence my personal motto: discipline pays.
It may take time for you to adapt my five steps to your own needs and personality, but I hope you do.
Pursued with discipline, I’m sure my method will deliver for you in spades.
Wednesday, September 5, 6:03pm, EDT, 2018