A Strategy for Resource Stocks; Investing Course

A Strategy for investing in highly volatile, cyclical stocks

Once again, gold, silver and their mining stocks are selling off for whatever reason: risk-on as money floods into the stock market, rising nominal yields, 95% certainty of a (meaningless) 0.25% interest rate hike, momentum–take your excuse. The main point is to know your companies (valuation) and wait for sales like you do at the grocery store.   This week we are having a sale on some miners.

As Sprott’s Rick Rule often says, “If you are not a contrarian in the resource sector, you are a victim.  The above video is provided to show a particular investing strategy when your quality miners are selling off to prices where you estimate a margin of safety.  However, it doesn’t mean you predict THE exact bottom.  If your holding period is three-to-five years, you can occasionally pick up cheaper merchandise. Use prices to your advantage, not disadvantage.  I also wouldn’t be surprised to see the miners sell-off further because of their highly volatile nature–huge operational and asset-based leverage–when gold or silver goes up or down, both the price of their product goes up or down and the value of their reserves.  Never expect exact timing–a fool’s game.  Also, miners are impacted by the cost of their inputs, so a rising gold/oil ratio is a positive, for example.

What about the gold price in my assumptions?   I am assuming gold is money (“All else is credit”–JP Morgan) and thus I can benchmark it against world currencies. Gold has been THE strongest money relative to all other currencies for the past 20 years, 30 years, 40 years, 50 years, 100 years.  Gold is THE only money and store of value that can’t be created out of electronic bits like FIAT MONEY.  The stability of available supple is what makes gold the premier money. Of course, due to LEGAL TENDER LAWS, gold is not a currency in the U.S., except that may be changing in some states like Arizona: http://planetfreewill.com/2017/03/09/Ron-paul-testifies-support-arizona-bill-treat-gold-silver-money-remove-capital-gains-taxes/.

In fact, gold (originally silver) is the only Constitutional money allowed–http://www.heritage.org/constitution/#!/articles/1/essays/42/coinage-clause

You can get a historical overview of gold’s‘ price history below. Notice a trend?

http://www.macrotrends.net/1440/hui-to-gold-ratio Now view the miners in perspective.

P.S. Let me know if anyone wants to see a NPV case study on a miner.

Designing an analyst course

My goal is to organize a comprehensive analyst course using the best investors’ teachings and lectures. For example, Buffett, Munger, Graham, Fisher, Tweedy Browne, Walter Schloss, Klarman, and many others etc.  Why not use original sources of the best practitioners?  This is the course I wish I had twenty years ago.  It will be Buffett and Munger teaching not me.

The course would cover search, valuation, portfolio management, and you (how to improve decision-making).   There would be different modules continuing articles, case studies, videos from Columbia Business School and others. We would go from DEEP VALUE to FRANCHISE INVESTING.   Valuing assets to assessing franchises. Understanding reversion to the mean and slow reversion to the mean.  You need to understand that when a moat is breached-watch out! Note Nokia in cell phones.

I would have to make it a private web-site because of copy-right.   This would be more of like a private study place, library, and discussion area for learning.   There could be a in-person value class in some convenient location depending upon interest once folks have had a chance to go through the modules.

For example, putting ebitda into perspective might be a mini-module on a sub-set of cash-flow: http://csinvesting.org/placing-ev-and-ebitda-into-perspective-case-studies/   Now, if you scroll down to the last link, you can see that it was taken down.   With a private web-site, you would see this: http://csinvesting.org/wp-content/uploads/2012/09/placing-ebitda-into-perspective.pdf

Let me know your thoughts because this would be a huge project to complete.  What focus do YOU want?   How would YOU design and make the course.

Have a great weekend!

37 responses to “A Strategy for Resource Stocks; Investing Course

  1. What about the Google Group? I would be very interested if there are in person sessions in the Washington, D.C area.

    • Sure Wes, but to make it effective, we would need a small group 5 to 15 people who have at least a solid grounding in investing to make cases worth while. In other words, we could have each person bring a valuation of an investment that they are interested in and then there is a critique.

      Or you and others may want to go through search, valuation, sizing, etc. The person who ultimately will make you a better investor is you.

      • Yes, I know the commitment involved is huge. What you are suggesting though sounds like an investment group where we bounce ideas off each other – or it could be structured in a way where first 30 mins could be a concept on putting EBITDA into perspectives and the next 45 minutes would be an investment case study presentation. That would leave both novices and experts to benefit.

        • Good suggestion. I will write up another post once I have all the ideas and suggestions collated. Thanks for the input.

      • Hey John,

        Would you happen to have some materials on cash flows for debt coverage aka DSCR? Like do we use OCF or EBITDA etc


        • use Distress Debt Analysis by S Moyer–it is in the Distressed Folder of Value Vault.

          If you use EBITDA make sure you deduct TRUE maint. capex as well. Pre-tax owners’ earnings might be EBITDA – MCX

      • I would LOVE to be apart of this John. This is something truly unique, thanks for putting it together.

  2. Eduardo Freitas

    You know I’m in John!

  3. Vidyanshu Pandey

    I would be interested. Have you seen Burry’s reading list? You have his case studies. It could be a complete course.

  4. That gold diagram doesn’t make a rational case for gold, but rather an emotional one.

    If you held $3500 worth of cash it would have been earning interest that whole time while the Gold would have been costing you money for storage(I suppose you can stick it in a safe or under your mattress). You would still have frictional costs when buying/selling it.

    So $3500 worth of cash sitting around in a savings account for 50 years earning 4% interest(you can use your own rate, or make more effort and calculate exactly) would be 25,775.82. The gold is still better but doesn’t seem as dramatic anymore.

    But if you are thinking of putting it into gold, you are probably considering other investments like real estate, stocks, silver, platinum, barrels of oil, etc..

    • Don’t forget that you pay taxes on the interest on dollars each year plus the risk of bank default. Yes, I know, not high if covered by FDIC insurance, but bank deposits are subject to total loss in a bank failure.

      stocks should do better than gold. Apples to oranges. Gold is NOT an investment–simply money or a store of value, unit of account, and a currency in the Middle East in certain places.
      Thanks for the comments.

  5. If you invested 3500 into the sp500 in 1967 it would be worth
    $9,800,000 today and would have been giving you dividends the whole time.

    • Oh, one more thing, gold can be exchanged for valuable goods, but it doesn’t grow or create wealth.

      Gold supply barely changes over the centuries. Think of a lighthouse on the horizon. The lighthouse (gold) doesn’t bob up and down, the boat does–(all other currencies).

  6. John, the investing course is a great idea. I am in. Perhaps run a course much like the one Ben Graham did but online, and covering franshie value as well. Each week teachers would come in with live examples of current case studies. In any event, whowever you decide to structure the course it is a wonderful idea.

  7. I am existed knowing that you plan to make a comprehensive analyst course, which hat will be immensely helpful for us. A detailed course outline, suggested reading list with emphasis on valuation, selection process and management of fund will be helpful for me.

  8. John, 100% in. Great idea. Perhaps some of us could bring investments from the private side as well to give it more breadth..

  9. I too would be interested in the analyst course.

  10. I am in DC area and will be very interested.

  11. Please start this course – I’ve learn about distressed value investing, buffett case studies and greenblatt special situations from this site so far. Would be good to apply some theory to the current equity market, critique and discuss some of the value investor club ideas.

  12. Hey John, I’m very interested in the analyst course. I’ve been reading several books on improving skills i.e Cal Newport’s books, Talent Code etc by looking at various domain i.e chess, music etc where the best does it through deliberate practice and I think in investing domain there has been a lack of these structured learning, although all the case studies you’ve presented here are a great starting point.

  13. I would be interested, Google group is a nice global option!

  14. All in, Jhon.

  15. Would definitely be interested in a natural resource investing course, based in the UK but would do my best to contribute to the discussion!

  16. My experience investing in resource stocks is that doing it right (from a fundamental perspective) is unusually labor intensive. There’s a lot to understand in terms of marginal production costs, etc.

    Nick de Peyster

    • Yes, I agree. So I tend to favor prospect generators and royalty companies like SAND, SLW, OR, etc.

      I stay away from big miners and explorers.

  17. I’m interested in joining the course.

    Suggested discussion:

    How to evaluate risk (not volatility) of capital loss?

    Make a list of stocks and prices, % allocations waiting for a crash (like John Templeton)

    • How to evaluate risk? That is part of your valuation. What are the negatives that your investment may face. Thus the need for a margin of error or safety. You believe with conservative assumptions that a company is worth $100 million so you try to buy a significant discount using your discount rate.

      See the recent Valeant debacle of Ackman’s–he invested with no margin of safety. We all make mistakes, so we have to incorporate that into our investment decisions.

  18. 100% in!

    I think for most of us who are not in the field professionally, we can read all about investing in theory from books and articles but lack the practical experience and applications. So actively doing the case studies and having the critique and feedback would be great for this course. Otherwise, we are on our own with no one to tell us how to improve or where we went wrong and what was missed.

    Sharing and demonstrating how certain things are done/calculated would be great help for myself who is a kinesthetic learner and learn best through doing it practically.

  19. I would be interested in joining. I don’t know how much if any you intend to charge. While the material here is for free, I think it would be a good idea to charge for the course as people don’t seem to appreciate what is coming for free and having to pay will motivate people to complete the tasks.
    At the end would it be possible to receive a certificate stating hours completed and you giving a pass grade?

    • I think you may be falling into the credential trap. Frankly, who cares if one has a CFA or MBA. What is the quality of your thinking and skills? The way to prove that is through a write-up of an investment idea(s). Or the results of your mini-portfolio.

      Note how many CFAs work for underperforming Mutual Funds. Note the CFAs who owned Enron and Housing stocks (in 2005/2006).

      I am NOT against CFAs or MBA, just that no one has ever shown me a correlation between having one and investment success. Note Walter Schloss who never graduated from College.

      If you wanted to be hired, I think a quality write-up would be a good idea to show you analytical and communication skills.

      • OK, I understand what you mean. I didn’t mean that I just want to participate for the credentials. Just thought that it would be a bonus. However, if a good write up would be all it takes, then of course it is not important at all.

        • You could show folks what you have been studying. But at the end of the day, they will judge you on your work–which is represented by your written idea. I know Joel Greenblatt hired a friend who wrote up a stock that sunk like a rock. The investment turned out to be a dud. But Joel liked his though process.

          I heard one time that Joel or someone in his office showed a potential recruit and idea by saying, “Look at this stock. I love it, how much should I buy.” The recruit turned around and said, “I would SHORT the stock and here is why.” That person was hired!

          I don’t know if this was a story or true, but I know Joel like a person who is independent in their thoughts.

          • These are interesting stories. Thanks for sharing.

            At the end of the day I guess you wouldn’t really want to work for someone who puts too much emphasis on credentials, such as CFA. They are probably pretty average investors. Then again, it may be even worse to have no job at all.

            I’ve been looking to get an internship position for a long time, learning under a value investor of quality, rather than going for an MBA or chasing the 3 CFA Levels. Admittedly I have a lot to learn when it comes to investment analysis. What I hoped to learn from an internship and through guidance by an experienced investor, I think I can learn if I were to take part in your course. Having someone pointing me in the right direction and getting feedback would be extremely valuable.
            I really hope that I can participate in this course.

  20. Let me know if I can help somehow.

  21. It’s an interesting idea. A few thoughts from my end:
    – You could organize each section to teach a fundamental skill or lesson and then have a case study that requires you to understand that lesson in-depth.
    – As part of the course, students should have to create at least one succinct pitch for a stock.
    – There could be sub-groups that are assigned that work together, offer each other feedback, etc.
    – Rather than charge for the course, you could have students commit to doing the work with one of the habit-forming/public-contract sites (i.e. stickk, beeminder)

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