A Story of Fear, Hope, Panic, and Euphoria

A Story of Fear, Hope, Panic, and Euphoria

All market participants are well versed in the old market saws about buying fear and selling euphoria. From my experience there is no segment of financial markets where these maxims apply more than commodities and more specifically junior mining equities.

Over the past decade the Canadian junior mining/exploration sector has experienced a roaring bull market thanks to the unprecedented bull run in commodities. However, within this decade old bull there have been numerous panics which have led to significant pullbacks, which most large cap equity investors would consider crashes. To say that junior mining stocks are “high beta” is sort of like saying Barry Bonds “took a few supplements”.

The panic/euphoria cycles are rapidly accelerated not only due to the small market capitalizations and relatively thin floats of most of these companies but also because investors are buying into a dream. By buying shares in a junior miner/explorer you are essentially betting that human ingenuity, sweat, and blood can turn a hole in the ground somewhere in northern Canada into truck loads of much sought after copper/gold/silver ore ($HG_F, $GLD, $SLV) which can be shipped across the Pacific to satiate a voracious Chinese appetite.

The rewards can be substantial with many stories of millionaires and billionaires created in stunningly short periods of time. However, for each huge success story there are dozens of companies that stumble along never creating value for shareholders, or worse yet, destroying shareholder value. I would like to highlight two exceptional examples from my extensive personal investment experience in the Canadian junior mining/exploration sector: Altai Resources and Copper Fox Metals. These charts tell a pure story of human emotion in financial markets, the cycle of investor emotion repeats itself over and over again. The only things that change are the time frames and magnitude of the emotional responses to new information. First I will begin with a chart of the Toronto Venture Composite Index:

 

S&P/TSX Venture Composite Index - A truly incredible chart which explores the full range of market emotional cycles, in one chart we have: Hope, optimism, euphoria, fear, panic, and despondency/dejection.

I, along with investors whom I advise, have been involved with both stocks below. Both of which have offered rollercoaster rides full of success, regret, and most of all many lessons learned:

 

Altai Resources- A highly speculative natural gas play in Quebec’s Utica Shale which taught me a valuable lesson about taking profits into a speculative euphoria. During Summer 2008 natural gas prices had reached record highs soon after an American company, Forest Oil ($FST), reported stunning drilling results which set off a speculative frenzy in the Utica shale. I had originally purchased shares in Altai at around .06/share in 2005 but unfortunately I got caught up in the natural gas frenzy of 2008 and did not sell as many shares as I should have near the top, in fact, I still own shares in Altai to this day.

 

Copper Fox holds the the place of being my greatest ever single investment – by buying during the late-2008 market crash I was able to achieve a return of over 5100% in just over two years. I sold 1/3 of the position to lock in gains but I remain a long term holder of the shares. Copper Fox has what is in my opinion the premier giant porphyry copper/gold/silver/molybdenum project in North America, which along with strong insider ownership makes it one of the very best Canadian junior mining plays.

By far the hardest part of being a junior mining investor is knowing when to sell- from my experience it is impossible to call the top, therefore it is necessary to scale out on the way up. Selling enough to recoup ones investment is an excellent rule of thumb to follow, then depending on ones personal risk profile you can ride your winners enough to achieve 10 baggers or maybe even 50 baggers like Copper Fox was for me. One 50 bagger pays for a lot of losers, of course buying opportunities like November 2008 don’t come along very often and to take advantage of them one must have some “dry powder” available.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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