The Capital Cycle: Junior Mining

Goethe, the poet-philosopher, wrote: “I find more and more that it is well to be on the side of the minority, since it is always the motre intelligent.

The urge that first sent me on a quest that ended in the Theory of Contrary Opinion was the disappointments and disillusionment that come to everyone who seeks a method “to beat the stock market.”

Take many chart-reading ideas, as an example. One can interpret charts almost any way he wishes. He can read into their “formations” just about any probable result he hopes for. Which is to say, that if one is bullish at heart his chart reading is liely to be interpreted optimistically; if bearishly inclined, charts accommodatingly will “say” that the market is going down.

So it was that I soon learned (the hard way) that not only were individual opions frequently wrong but that my own judgement was often unprofitably faulty.

Accordingly, I turned to a study of mass psychology in the hope of finding the answer to the riddle of “why the public is so often wrong.” (and that meant why I was so often wrong).

If individual opinions are unreliable, why not go opposite to crowd opinion—that is, contrary t0o general opinions which are so often wrong?

That said and with severe pessimism coming back into miners and gold circa end 2015/early 2016, take another look.  I suggest reading reports several years back so you can see how managements react to the cycle.

Also, you need to be:

7 responses to “The Capital Cycle: Junior Mining

  1. “Accordingly, I turned to a study of mass psychology in the hope of finding the answer to the riddle of “why the public is so often wrong.” (and that meant why I was so often wrong).”

    What conclusions did you form from that studying?

    “If individual opinions are unreliable, why not go opposite to crowd opinion—that is, contrary t0o general opinions which are so often wrong?”

    Although I would say that going against the grain is oftentimes what is necessary to achieve fantastic investment returns, I do not believe it should be held as a first principle. Imagine applying a principle like that to your life as a whole, where you acted in ways just because it was opposite to what most people did. Sure, you would likely benefit from some of those actions, but some also might get you killed (literally).

    In my view, if you’re trying to anticipate what the crowd is doing or is going to do, whether it’s so you can go with them or against them, you will be forever divorced from independent thinking.

  2. I didn’t mean for contrary opinion to just be reflexive. It should be a TOOL to aid in thinking. It takes a long time to use it effectively.

    The Theory of Contrary Opinion
    “When everybody thinks alike, everyone is likely to be wrong.”

    That’s what Humphrey B. Neill wrote in his seminal contrary opinion book, The Art of Contrary Thinking, first published in 1954.

    But Neill was only following in the footsteps of Gustave Le Bon, who in 1896 produced, The Crowd, A Study of the Popular Mind.

    And Le Bon was only following in the footsteps of Charles MacKay, who in 1841 wrote, Extraordinary Popular Delusions and the Madness of Crowds.

    Humphrey B. Neill
    Gustave Le Bon
    Charles MacKay

    Today, the topic of all three of these books might be called “crowd psychology.”

    And the funny thing is that even though experts have been writing about crowds for a very long time, and trying to make us smarter about our behavior, the behavior of crowds hasn’t changed!

    Individually, we may be brilliant, but as groups, we can be stupid as sheep.

    Humphrey Neill was concerned in particular by the role of contrary opinion in the field of investing, and it’s through my investment advisory business that I was introduced to the concept.

    So let’s look at an example of contrary opinion in action, using a company known to all investors—and probably all Americans—today, Apple.

    Apple As a computer company, Apple was never a great success; competition was tough, and Apple’s products were expensive. (I should know, I bought Cabot’s first Macintosh in 1987 and I’ve bought countless more since.)

    Then in 2003, Apple introduced the iTunes Store, offering digital downloads for 99 cents, in the process providing the first practical alternative to the problem of illegal song sharing. (The first iPod had been introduced in 2001, but it was the iTunes Store that got the stock moving.)

    That was followed, of course, by more iPods, and then iPhones and iPads, and with each new release, Apple gained more and more converts, and more and more investors. When the iTunes Store opened, Apple stock was trading in the low teens; virtually ignored by both institutional and individual investors. But in the decade that followed, more and more institutions climbed on board, and more and more individuals joined them, in the process turning Apple into the most valuable company in the world, valued at more than $660 billion.

    And then, in September 2012, AAPL peaked! The top price was 705, a number that I expect to stand for a very long time. There was no sign of trouble at the time; in fact business was great, with revenues and earnings still growing at double-digit-rates. Everyone loved Apple, and there was no doubt that it would continue to grow for years to come.

    Yet AAPL stopped going up! And it started going down! And before six months had passed, AAPL had lost more than 40% of its value! Fundamentally, there was no way to explain it. Apple was still growing revenues and earnings, and there even rumors of a great Apple TV product. But the stock wasn’t listening.

    So why did AAPL top out? Because perception of Apple couldn’t get any better, and because every possible shareholder was already on board. And when some shareholders began to revise their opinions ever so slightly downward, as they perceived that growth was beginning to slow, there was no one to sell their stock to at that high price! All the possible buyers had bought!

    So prices had to fall to enable existing shareholders to reduce their positions.

    Most observers of Apple’s huge sell-off were dumfounded. There was no way to explain the decline fundamentally, and the broad market was strong. But practitioners of contrary opinion understood what was happening perfectly. In fact, they saw it coming, knowing that as Apple became the most popular stock in the world, any downward change in perception could start a major-league decline. And it did.

    Note: You can read two very relevant columns I wrote on AAPL, one from before the top , and one from shortly after.


    It Works at Bottoms, Too!

    Contrary opinion is not only good for identifying dangerous tops, it’s also good for identifying opportunities at bottoms.

    Consider 2008, after the sub-prime mortgage industry collapsed, and the dominos fell, damaging the entire mortgage industry, the entire housing sector, the entire stock market and a large part of the U.S. economy. It got so bad that by early 2009, people were taking money out of banks and stockpiling it at home, in case banks began to fail.

    Well, that was the time to buy, exactly when optimism was the most contrary opinion in the world.

    In fact, on March 23, 2009 (just 17 days after what would prove to be the bottom), I wrote in Cabot Wealth Advisory, “Today the market’s big downtrend appears finished, and a new uptrend is trying to establish itself… we now have seven consecutive days in which the number of stocks hitting new lows on the NYSE has been fewer than 40. We also have numerous major indexes whose intermediate-term trends are poised to turn from negative to positive. Coming off a bottom that’s brought the lowest consumer confidence numbers in history, this uptrend has the potential to be a big one … precisely because no one expects it.”

    Now, I do want to point out that there’s more to the successful practice of contrary opinion than just being contrary; the world is full of cranks who’ll argue with you because they enjoy conflict. It seldom gets them anywhere.

    Real success comes not from simply being contrary, but from first considering the contrary point of view, to see if it might have merit. If the answer is yes, the next task is attempting to identify the point at which public opinion reaches an extreme, because you don’t want to be too early.

    In the case of Apple, contrary thinkers were well aware that the stock’s growing popularity would eventually turn into liability.

    And as the stock market (and the economy) plummeted in late 2008, contrary thinkers were well aware that eventually, the indiscriminate selling would lead to a great buying opportunity.

    But in both cases, acting too early in a contrary way might have been painful. In both cases, it was better to wait until the tide had definitely turned, and then, having anticipated the turn, act decisively.

    In conclusion, contrary opinion is not always applicable. And it is decidedly not easy. It requires continued effort to calmly appraise the temperature of the public’s attitude. And it requires continued practice to think independently. But the rewards can be substantial, for the dedicated practitioner.

    P.S. If you’d like to pursue it further, the books of the gentlemen at the top of the page are a good starting point.

  3. The same holds true for Japan. Just the other way round. Not the case for Gold in the same extent!

  4. By the way. I am well aware that I am a pain in the ass.
    Anyways. Luck or skill? I am starting to wonder!

  5. “I didn’t mean for contrary opinion to just be reflexive. It should be a TOOL to aid in thinking. It takes a long time to use it effectively.”

    I was kind of going to an extreme by talking about applying being contrarian to your life as whole. I guess I don’t think the concept of herd mentality really provides much use other than showing that just because the majority of people do a particular something does not tell you whether or not you should do it.

    I’m convinced that many of the great “contrarian” investors out there actually don’t see themselves as contrarians, in spite of the fact that they may sometimes tell the average person that you have to be a contrarian to be a great investor. They just happen to see value where hardly anyone else does, so the appearing contrarianism is a consequence and not in any way a part of their core philosophy. I think a great example of this is Dr. Michael Burry, who you have mentioned on your blog. I don’t believe him shorting subprime mortgages had anything to do with him trying to be contrarian. He simply saw that the corresponding mortgage bonds would clearly fail once rates reset, and that the bond prices clearly did not reflect that. The fact that he has Asperger’s made me curious about whether or not that had any influence on his mentality.

    Lately, I’ve been doing a lot of research on Theory of Mind (ToM) and herd mentality. ToM, which is in part the ability to attribute mental states to other people, is diminished in those that have Asperger’s. It is believed that people’s use of ToM may contribute to financial bubbles:

    This could explain why someone like Burry would have a natural edge over other investors. I believe that, to him, shorting subprime and buying stocks in early 2009 was not him trying to be contrarian, but him simply doing what made sense to him. His diminished ToM made it to where he didn’t really care what other people were thinking/doing or what other people thought about what he was doing. If this is true, then the best that a neurotypical person can hope for is to imitate this by being a contrarian by going against their natural urge to go with the herd, but it will never match genuine independent thinking, which their neurology likely makes impossible for them, unfortunately.

  6. “If individual opinions are unreliable, why not go opposite to crowd opinion—that is, contrary t0o general opinions which are so often wrong?” Is there a sentiment indicator that performs better than valuation over the medium to long term?

    Nick de Peyster

    • I think you have to have a combination of valuation, reaction to news and a mosiac of news.
      For example, if you are in a cyclical industry like mining or shipping you would need to see a dearth of new investment/reduction in supply over time along with a period of declining prices below asset replacement values, let’s say to begin to see where the crowd goes wrong extrapolating the obvious into too long a time frame.

      Also, contrary thinking is more about testing your own and the majority’s opinion as to where you might be wrong.

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