Most investors hate volatility. It usually stems from sudden, unpredicted change, which is often bad for mainstream assets. For that very reason, however, volatility is good for safe-haven assets like gold and silver. And it can be even better for gold and silver stocks.
The key here is simple: volatility is great for building positions in winning stocks.
You see, even the best geologists, analysts, and rock-kicking lobos can’t predict a great discovery. Most employ a shotgun approach and hope to get lucky. That requires a willingness to take many losses, which most investors can’t stomach.
But after a big discovery has been made obvious to the world, it’s too late. The stock has already shot up 5x, 10x, or higher.
Enter our friend, volatility.
Say we missed a world-class discovery. The stock has become a market darling. The company is valued at more than the deposit is realistically worth. We wish we’d gotten in sooner, but it’s too late.
But then a market meltdown—such as we’re experiencing now—hits. Everything gets whacked. Everything. That’s not because people can’t tell the difference between winners and losers, but because they’re getting margin calls and have no choice. Funds face redemptions and have no choice but to liquidate positions. Or they are simply fearful and turning their wins into cash.
This results in our former market darling going on sale 50%... 75%... maybe even more. Let’s say the market was valuing this exciting gold discovery 150% of its estimated net present value (NPV). Now, after the volatility of the last two weeks, the share price is down 50%. This brings the market valuation down to 75% of NPV. This is a much better deal.
This can happen with little or no decrease in the value of the underlying discovery—and sometimes despite value added through ongoing exploration success.
This is why I see major bouts of market volatility as being like stock market time machines.
We can’t go back in time, but volatility can give us a chance to buy great stocks at prices that slipped away from us in the past.
That’s great, but it still leaves us with the problem of deciding when to buy.
I know people who got lucky buying at market bottoms. But I’ve never seen anyone document an ability to reliably call market bottoms. I certainly don’t pretend to be able to do so.
I do know I don’t want to try to catch a falling safe. Better to wait until it’s clearly hit the pavement and then look to see what’s available at fire-sale prices.
Hence my current motto: “Go to cash, wait for the smash.”
But that doesn’t mean we’re helpless.
We know that the 2018 meltdown lasted about a month. If this year’s episode is like that—which it may well be, with the Fed already jumping in to help—we’ve got a couple more weeks to go before the bottom.
We also know that the waterfall events of 2008 lasted a good three months. That too is clearly a possibility this year. With the Fed’s emergency rate cut resulting in an even greater decline in the major US stock indices, no one can say otherwise. If this is how it plays out, we’ve got a couple months to go. Almost all stocks—even gold stocks—are likely to get much, much cheaper before they bottom.
I still don’t know which it will be.
But with the economic fallout from the accelerating coronavirus outbreak just getting started, I think it would be a huge mistake to rule out a 2008-style scenario.
If it’s wise to plan for the worst and hope for the best, that means being patient now, and accumulating as much cash as possible.
To me, this doesn’t mean realizing losses on great gold and silver stocks that I’m sure will weather the storm.
It does mean pruning losers and liquidating more mainstream investments that are highly vulnerable to the economic debacle unfolding before our eyes.
How will we know when it’s time to buy?
On the macro level, it will be when it’s clear that the global financial response to the current market meltdown is working.
On the micro level of individual stocks, it will be when we can’t believe how stupid-cheap great stocks have become.
Are we there yet?
Not by a long shot.
Are there great bargains on the market already—deals that might slip through our fingers?
But today’s deals could easily become expensive mistakes after we go over the next waterfall.
Personally, I’m holding the great stocks I have and not buying anything until I’m sure I’ve seen the safe well and truly cratered into the pavement.
What if there were some bargains I just couldn’t resist right now? Well, I’m very good at resisting. If I just couldn’t stand the thought of some bargain slipping away, I’d look myself in the mirror and say: “I’m okay with buying this and seeing it drop another 50% or 80% lower before it heads back up again.” If I could do that without wincing, I might act.
But all the trends I see tell me there’s likely more downside in the immediate term, so I’m not tempted to buy anything today.
However you decide to play this yourself, remember that volatility—the stock market time machine—can be your friend.
That’s my take,
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