For JDH,
Let's say you find a junior resource stock you want to buy.
Good fundamentals. Over sold. Chart showing a bottoming pattern. Lots of recovery room to run. Drilling results coming in a few months. A great over sold buy.
But the stock is 50% off its highs. Maybe 60% off.
It has suffered from irrational selling.
So you buy it.
And then you sell the stock the next day because it is down over 20% from its high and your rule says to sell all stocks more than 20% off its high.
That's what you just did with Mega, JNR and Cash.
You can't just implement a new rule and have it apply to existing stocks that the rule wasn't written for.
Your 20% rule works great for trying to determine the exit point on a swing trade.
Meaning, figuring out when a stock you're in has topped out in a short term bull market rally. And with a swing trade, I would use 5%, not 20%.
But, if you're holding a long term stock (not a swing trade), the rules should be different.
Uranium resource stocks should run at some point in the next 2 to 3 years.
When, we don't know.
So, you should either hold the best based on fundamentals or you should not be in uranium resource stocks and use that money somewhere else.
I would have different rules for different types of stocks.
A 20% fall off of highs for a large cap is a good indication to sell.
But with junior resource stocks, if the fundamentals are still good, you got to give them time to explode (that's why we're in them). A 50% drop is normal. If you keep selling them when they drop 20%, you will find yourself with lots of 20% losses that will add up quickly. And you won't be in the stocks when they explode upwards.
Many of us had these incredible 100% years the past few years and we are now so impatient when our stocks don't repeat that year to year. If you want big returns, play the junior miners in an ongoing bull market, and be patient. If you can't handle big short term losses while waiting, switch to large caps and be happy with 15% annual returns.And if you want to swing trade, great. But buy low and sell high. Don't sell after the 80% drop. That's when you buy.
Selling Mega, JNR and Cash at what look to be consolidation lows right before the best months of the year (seasonally) shows a flaw in your strategy.
If you didn't sell them when they were 20% below their highs in May, then it is too late to apply your rule to them.
Now you need to apply your buying rule to them, not your selling rule.Are these good stocks with room to run over the next few years and is this a good buying point. For Mega and JNR, I say yes. Not sure Cash passes the "good" stock requirement.
Let me leave you all with you excerpts from this week's Casey's Room:
[Excerpt from a e-mail from Rick Rule to Casey's David Galland}
Sick of resource stocks underperforming? Absolutely. I had a long conversation with a client today who was disappointed in the recent performance of her portfolio. I told her that a big part of the problem is unrealistic expectations on the part of investors. Junior exploration companies have no gold, so why should they go higher simply because gold prices go up? Yes, it happens for a while because individual investors either don’t differentiate between a producer and an exploration company, or they don’t fully understand the miniscule odds of an economic discovery being made by one of these companies.
But at some point, the companies must discover something to justify their inflated market caps, and most won’t. When one of them actually does find something, the market is definitely there (witness Canplats and Diamonds North). Maybe that’s what it will take to reignite the juniors – a Diamond Fields-type discovery that moves a stock by 100 times. Personally, I think that’s the phase of the market we are in now. Higher gold prices just don’t matter to companies with no gold.
Another problem has been the amount of new paper being issued by this sector. Lots of our clients sell because they need money to fund the next placement. Demand for junior resource stocks is being fed by companies issuing new shares, not by accumulation in the secondary market. Good for the companies, as well-fed treasuries are important, but frustrating for existing investors because all that buying has no immediate impact on the market price of the stock.
In uranium, the easy money was made when ever stock went up with no news for three years. Not sure if we'll ever see that again. That ended last April.
In the next phase, the stocks with real prospects and producers will run up (these should run up more than their counterparts did in the easy money phase). When will this start, I think it starts now and goes for 2 to 3 years. It will be slow and unnoticeable for pats, but it will happen. It will be the Wall of Worry phase ending with the mania phase around 2010.
Not sure if gold juniors already finished their easy money phase or not.
All I know is that I'm not giving up on uranium juniors, but I no longer hold 61 uranium juniors expecting they will all double. I'm down to 34 of the best and still trying to whittle that down.
If you've made it this far, let me leave you with my pity story of the year.
In the spring of 2006, I continually bought puts on Countrywide Financial (CFC). 20 some contracts at the $30 level for Jan. 2007, when the stock was trading in the 40's. I knew the stock sucked and would come crashing down. I was hoping to make a fortune if the company went under. But timing is everything. I lost a bunch on money waiting. The markets rallied July of 2006 (thanks Hank Paulson --- US Treasury Sec). So I took my losses.
But I knew the trade was right. Long term CFC was a horrible company and would be caught up in the mortgage meltdown. I bought more CFC puts into 2007. $30 puts for Jan 18, 2008. 10 more contracts to try again.
But I got frustrated when CFC kept buying back their stock and propping it up. A rumor that B of A would buy the company in March 2007 shot the stock higher. The stock was trading at $42 in April and I dumped my puts for a small loss again frustrated that my trade wasn't working.
Of course, CFC traded under $6 this week. And those $30 puts I dumped out of frustration at $1 in April 2007, traded at $around 24 this week. I bought them at $2. That would have been a x12 trade. How many of those do you ever see.
We all feel uranium will explode when the supply/demand crunch really hits hard and those countries that don't care about environmental laws, like China and India, keep building new plants and don't have uranium to run them. And then we have Sovereign Wealth Funds buying up small uranium companies.
The fundamentals have not changed from 2003 with uranium.
So why shouldn't we wait with the best companies in our portfolios for the trade to materialize as we expect.
Patience is the key to let your trades materialize to match your long term expectations.
Leave your trades too early because of small to even large losses means you won't be in the trade when your long term expectations finally hit.This is a lesson we all need to learn more!
(Expecially me)
[I also dumped the puts I bought on MTG and XLF at the same time as I dumped the CFC puts I bought. Right idea, bad timing. Which is why I can't buy options anymore, I don't have the right emotional temperment. I need to let my long term trades do their things.]
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