Tag Archives: Gold mining stocks

How to Lose Money Consistently; A Contrarian Speaks

buy buy sell sell

First, I get my stock tips from experts.

Second, I wait until the recommended stock goes up after the broadcast tip to make sure the trend is your friend.  Who needs to understand accounting anyway or the present value of free cash flow.  I mean understanding the magnitude and sustainablility of free cash flow or how the business makes money is old news.  Compare expectations versus funamentals?  I go with price because price is all.

I don’t need to think probabilistically because there are sure things like following Jim Cramer’s recommendations.

I am often wrong but never in doubt.

What behavioral biases? I am right, always right.  I don’t need losers like you second guessing me.

Now why would I blindly follow Jim Cramer?  The most important part of investing is having someone to blame when you lose money.  I typically lose 9 out of ten times and my losses are triple my wins.   Consistency wins!

Please read: http://ericcinnamond.com/parachute-pants/   A fantastic blog of knowledge from an experienced investor.

This article hits home because I have also felt the pain of being a contrarian as anyone who types in “gold stocks” in the search box can see.


I bought AG in mid-2014 at $8, then $4.50, then $3. Over two years, I was down over 45% based on my average price.  Clients screamed. One said that if my IQ was higher, he could call me stupid.   One client took out an insurance policy on me and told me that I might have an accident.   Now all is forgiven. Yes, I have sold some AG but still retain a position because conditions haven’t changed, but the price has begun to discount the good news. Risk is higher now than in 2015. Yet, there doesn’t seem to be a mania into these stocks–so far.  But mining stocks are burning matches where their assets deplete and deplete.  You have to jump off the train when people are clamouring for these companies.

Parachute Pants

Did your parents ever tell you not to worry about what other people think? I remember my mother telling me this when I was in eighth grade. I’m not sure if she was simply giving good advice or trying to talk me out of buying parachute pants. In the early 80’s parachute pants were a must have for the in crowd. I wanted to fit in, but my mom convinced me it wasn’t necessary to act and dress like everyone else. In hindsight, good call mom. Now if only she would have talked me into cutting off my glorious “Kentucky waterfall” mullet! The pressures of conforming and fitting in don’t go away after eighth grade – it sticks around many years thereafter. Investing is no different.

In the past I’ve discussed and written about the psychology of investing and the role of group-think. The pressure to conform in the investment management industry is tremendous, especially for relative return investors. As their name implies, these investors are measured relative to the crowd. One wrong step and they may look different. Looking different in the investment management business can be the kiss of death, even if it’s on the upside. If a manager outperforms too much, he or she must have done something too risky or too unconventional. For some relative return investors being different (tracking error) is considered a greater risk than losing money. Losing client capital is fine as long as it’s slightly less than your peers and benchmarks. From what I’ve gathered over the years, to raise a lot of assets under management (AUM) in the investment management industry, the key is looking a little better, but not too much better, and definitely not a whole lot worse.

How did we get here? Since my start in the industry, relative return investing has gradually taken share from common sense investing strategies such as absolute return investing. How well one plays the relative return game is a major factor in determining how capital is allocated to asset managers. I believe this is partially due to the growing role of the institutional consultant and their desire to put managers in a box (don’t misbehave or surprise us) and turn the subjective process of investing into an objective science. Institutional consultants allocate trillions of dollars and are hired by large clients, such as pension funds, to decide which managers to use for their plans. The consultants’ assets under management and their allocations are huge and have gotten larger over time, increasing the desire by asset managers to be selected. This has increased the influence consultants have on managers and how trillions of dollars are invested.

During my career I’ve presented hundreds of times to institutional consultants. While I have a very high stock selection batting average (winners vs. losers), my batting average as it relates to being hired by institutional consultants is probably the lowest in the industry. It isn’t that they don’t understand or like the strategy. In fact after my presentations I’ve had several consultants tell me they either owned the strategy personally or were considering it for purchase. Although they appreciated the process and discipline, they couldn’t hire me because I invested too differently and had too much flexibility and control (for example, no sector weight and cash constraints). In other words, they liked the strategy, but they were concerned that the portfolio’s unique positioning could cause large swings in relative performance and surprise their clients. In conclusion, in the relative return asset allocation world, conformity is preferred over different, as investing differently can carry too much business risk (risk to AUM).

Over the past 18 years the absolute return strategy I manage has generated attractive absolute returns with significantly less risk than the small cap market. Isn’t that what consultants say they want – higher returns with lower risks? Yes, this is what they want, but they want it without looking significantly different than their benchmark. This has never made sense to me. How can managers provide higher returns with less risk (alpha) by doing the same thing as everyone else? Maybe others can, but I cannot. For me, the only way to generate attractive absolute returns over a market cycle is to invest differently.

Investing differently and being a contrarian is easy in theory. When the herd is overpaying for popular stocks avoid them (technology 1999-2000). Conversely, when investors are aggressively selling undervalued stocks buy them (miners 2014-2015). It’s not that complicated, but in the investment management industry, common sense investment philosophies like buy low sell high have been losing share to investment philosophies and processes that increase the chances of getting hired. Instead of asking if an investment will provide adequate absolute returns, a relative return manager may ask, “What would the consultant think or want me to do?” I believe the desire to appease consultants and win their large allocations has been an underappreciated reason for the growth in closet indexing, conformity, and group-think.

In my opinion, the business risk associated with looking different has reduced the number of absolute return managers and contrarians. And some of the remaining contrarians don’t look so contrarian. For example, look at the four-star Fidelity Contra Fund. According to Fidelity this “contra” fund invests in securities of companies whose value FMR believes is not fully recognized by the public. Three of its top five holdings are Facebook, Amazon, and Google. I suggest the fund be renamed to the “What’s Working Fund”. With $105 billion in assets under management, one thing that is working is the sales department! Wow, that’s impressive. What would AUM be if the fund actually invested in a contrarian manner? My guess is it would be a lot lower, especially at this stage of the market cycle when owning the most popular stocks is very rewarding for performance and AUM.

I’m not just picking on Fidelity. The relative return gang is in this together. After the last cycle we learned most active funds underperformed on the downside. Given the valuations of some of the buy-side favorites currently, I suspect they’ll have difficulty protecting capital again this cycle once it undoubtedly concludes. This could be the nail in the coffin for active management. If the industry is unwilling to invest differently and they don’t protect capital on the downside, why not invest passively and pay a lower fee?

In my opinion, given the broadness of this cycle’s overvaluation, the most obvious and most difficult contrarian position today is not taking a position, or holding cash. In an environment with consistently rising stock prices and the business risk associated with holding cash, I don’t believe many managers are willing to be patient. That’s unfortunate because I’ve found the asset that is often the most difficult to own is often the right one to own. The most recent example of this is the precious metal miners.

After the precious metal miners crashed in 2013, I became interested in the sector and began building a position. Besides a couple positions I purchased during the crash of 2008-2009, I had never owned precious metal miners before. They were usually too expensive as they sold well above replacement value (how I value commodity companies). Miners are a good example of how quickly overvalued can turn into undervalued. In addition to selling at discounts to replacement cost, I focused on miners with better balance sheets to ensure they’d survive the trough of the cycle.

After the miners crashed in 2013, they eventually crashed again in 2014 and became even more attractively priced. I held firm and in some cases bought more in attempt to maintain the position sizes. After adding to the positions in 2014, they crashed again in 2015 and early 2016. I again bought to maintain position sizes. I’ve never seen a group of stocks so hated. Many were down 90% from their highs – similar to declines seen in stocks during the Great Depression. The media hated the miners with article after article bashing them and calling their end product “barbaric”. I haven’t seen many of those articles recently. The bear market in the miners ended in January. Today they’re the best performing sector in 2016, as many have doubled and tripled off their lows.

Owning the miners is a good example of how difficult it can be to be a contrarian. While clearly undervalued based on the replacement cost of their assets, there didn’t appear to be many value managers taking advantage of these opportunities. I thought, “Isn’t investing in the miners now the definition of value investing? Where did everyone go?” It was extremely lonely. Some investors argued they weren’t good businesses as they were capital intensive and never generated free cash flow. Obviously they’re volatile businesses, but after doing the analysis I discovered that good mines can generate considerable free cash flow over a cycle. Pan American Silver (PAAS) did just that during the cycle before the bust. As a result of past free cash flow generation, Pan American entered the mining recession with an outstanding balance sheet. New Gold (NGD) is another miner with a tremendous asset in its low-cost New Afton mine, which also generates considerable free cash flow. I also owned Alamos Gold (AGI). Alamos had a new billion dollar mine, Young Davidson, which was paid for free and clear net of cash and was expected to generate free cash flow. Alamos was an extraordinary value near its lows and was the strategy’s largest position in 2016.

Assuming a mining company had developed mines in production, generated cash, and had a strong balance sheet, I believed while the trough would be painful, these companies would survive and prosper once the cycle turned. They weren’t all bad businesses when viewed over a cycle, as all cyclical businesses should be viewed. Furthermore, many had very attractive assets that would take years if not decades to replicate. In the end, survive and thrive is exactly what happened for many of the miners this year. I sold several of the miners as they appreciated and eventually traded above my calculated valuations. The remainder were liquidated when capital was returned to clients.  It was a heck of a ride and was one of the most grueling and difficult positions I’ve ever taken. But it was worth it.

The reason I bring up the miners is not to boast, but to illustrate how difficult it is to buy and maintain a contrarian position in today’s relative return world. I believe it helps in understanding why so few practice contrarian investing, or for that matter, disciplined value and absolute return investing. During the two and a half years of pain (late 2013-early 2016), equity performance in the strategy I manage suffered. I initially incurred losses and was getting a lot of questions — I had to defend the position. Relative performance between 2012-2014 was poor (high cash levels also contributed to this). During this time, the strategy lost considerable assets under management. People were beginning to believe I lost my marbles. Whether or not I was going crazy is still up for debate, but one thing was certain, holding a large position in out-of-favor miners wasn’t encouraging flows into the strategy. While the miners were eventually good investments, in my opinion, they were not good for business.

As value investors we often talk about being fearful when others are greedy and greedy when others are fearful. However, in practice it’s extraordinarily difficult. In addition to the pain one must endure personally from investing differently, a portfolio manager also takes considerable career and business risk. Given how the investment and consultant industry picks and rewards managers, it can be easier and more profitable to label yourself as a contrarian or value investor, but avoid investing like a contrarian or value investor. Instead simply own stocks that are working and are large weights in benchmarks – the feel good stocks. I’ve always said I know exactly what stocks to buy to immediately improve near-term performance. Playing along is easy. Investing differently is not.

Investing to fit in with the crowd may feel good and it may be good for business in the near-term, but fads are cyclical and often end in embarrassment (google parachute pants and click on images). Participants in fads and manias often walk away asking “What was I thinking?”. But for now owning what’s working is working, so let the good times roll. I’ll stick with a more difficult position. Just like I did with the miners, until it pays off, I plan to stay committed to my new most painful contrarian position – 100% patience.   —

Boy does the above post ring true. 


Readers’ Questions: Studying a Company; Gold Stocks; Down and Dirty on EGD.V

Mkt Cap to GDP

Investing, when it looks the easiest, is at its hardest. When just about everyone heavily invested is doing well, it is hard for others to resist jumping in. But a market relentlessly rising in the face of challenging fundamentals–recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S.– is the riskiest environment of all.–Seth Klarman

Read more on Buffett’s market indicator flashing red: http://greenbackd.com/2013/05/22/warren-buffetts-favored-measure-of-market-valuation-passes-unwelcome-milestone/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+Greenbackd+%28Greenbackd%29


Reader #1: To give you a bit of an introduction about myself, I am based in Singapore and a third year accountancy student. Have been researching Asian equities for quite a while and would like to seek your opinion on my analysis process.

I have read many books on value investing; Greenwald, Graham, Fisher and also accounting books like Financial Shenanigans. However, this is what I noticed whenever I am about to start working on a company.

Financial statements: I am able to pinpoint out the basic stuff like gross margin, ROA, ROIC, balance sheet ratios etc. But to be able to paint the full picture of a company, I am still not quite certain of my ability to do so yet. I have seen how some investors are able to tell a story using the financial statements (Have seen in newsletters of funds, books). Like picking out the nitty-gritty stuff.

Qualitative aspects: I start out first by reading the past few years of annual reports to get an idea of the corporate structure of the company and the business model. This step is generally OK. However, I am kinda unsure how to proceed on from here. What I usually do is that I just google the business model. Etc this company sells jewelry. I google jewelry business/how is jewelry manufactured and sold…you get my point. 

But somehow, I still feel kinda lacking when I compare my analysis with the fund managers here. I read their newsletters, download conference calls transcript to see what questions they ask etc. And their level of understanding of the business simply astonishes me! 

Not sure how you go about doing it but would like to hear from you!

My reply: You may need to learn more about analyzing an industry/business. As you first look at a company you want to answer several questions:

Does the company have a competitive advantage as shown by fairly high and consistent profitability and/or market share? If yes, then what is the source of competitive advantage? Patents/Copyrights (Disney), Unique Asset (Compass Minerals) , economies of scale coupled with customer captivity (Coke), etc. Is the moat weakening or strengthening?   What price will you pay for growth?

You could draw up an industry map to understand the business better. Read Bruce Greenwald’s Competition Demystified or (Use search box on csinvesting.org and follow links to download cases on Coors, Coke, etc.).

Read: Strategic Logic by J. Carlos Jarillo and The Curse of the Mogul, What’s Wrong with the World’s Leading Media Companies by Jonathan Knee and Bruce C. Greenwald.  Also, The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow’s Profits by Adrian J. Slywotzsky.

If the business has no competitive advantage–95% of most businesses–then can management earn a fair return on the company’s assets?  Does management allocate capital effectively; do they eat their own cooking?

Always try to find a thesis for a variant perception. Is there hidden value in this company like shutting down a losing subsidiary, NOLs, underutilized assets, etc. Where can I develop an understanding that will give me an edge?

Read with a purpose. Develop a checklist of your own. Try to determine the key metrics of the business. What are the risks in the business?

Try to read biographies of business leaders in a particular industry. You can find  books about the cruise ship industry, steel, beverages, sports, media, and airlines. Also, try to speak to people in the business and industry once you have a basic understanding of the business. Read about the history of the industry–its booms and busts–what are the opportune times to buy and sell such a business?

But until you spend about ten years studying hard, it is difficult to develop proficiency in anything, so patience.  Good luck.

Reader #2:

I have been dipping my toe into gold stocks having owned Yukon Nevada and Energold (EGDFF) over the last year or so.  I am thinking along your lines that I need to diversify into ten or so names with a mix of producing and near producing.  I wondered if you knew the current top 10  GSA recommendations and if there were any other stocks at the exploration or near producing end that you thought were worth further investigation. I see Weiss has a large position in Seabridge, but I don’t really know how to analyze the opportunity?

My reply: Like this gentleman, http://truecontrarian-sjk.blogspot.com/, I am drawn to cheap assets.   Precious metals miners (GDX and GDXJ) certainly qualify. The more I study mining, the more I dislike the business. These businesses are highly capital intensive, they are price takers and subject to many operational risks. Right off the bat, you HAVE to buy these assets cheaply to reduce your risks and you must diversify (8 to 12) names to take advantage of the insurance concept of GENERAL cheapness. One of your companies could get swamped but overall your other companies will flourish. I bought Energold last week once it went 15% below $2.00 per share because then you were buying  the company for less than its working capital of which 40% of that was cash. I don’t buy the thesis that Energold has a competitive advantage. I am buying cheap assets.

The mining industry has four tiers: Senior Producers like Yumana, Newmont, Agnico-Eagle, Goldcorp, Barrick. Then you have mid Tier Producers like EGO, GORO, and NGD, then you have developmental companies like Seabridge, Pretium and  others which may be years until production. Finally, the lottery tickets like explorers found in GLDX.

If you want exposure to bullion, I recommend CEF at a 2% discount or more. Avoid GDXJ because of some of the low quality names in that index. You might want TOCQUEVILLE. John Hathaway, the fund’s manager, has a long experience and good reputation. Read his letters for several years. See his fund below:TOCQUEVILLE


Above, is GROW (US Global Investors) this may be a cheap way to participate in the rebound in precious metals and commodities. The current price seems to be at a discount to its cash and AUM of $1.3 billion using 2% of AUM (pay less than $3 per share).

Another way to reduce your risk through diversification and avoiding operational mining risk is to look at the royalty/streamer companies like SLW, RGLD, SAND, FNV. Though they are not as statistically cheap, they have huge free cash flows. I think those companies will be needed more and more to finance future exploration and development. Put your hat in the ring with experts. Now is a better time to be buying than in the past five years based on valuations.

The safer strategy would be to go with Tocqueville because you get broad diversification with a manager who knows his companies. The downside is the annual fee. However,  You can make decent returns when this sector rebounds and be ready to sell when his fund become popular again. Look at Fairholme last year with its heavy investments in financials–a formerly out of favor sector:


The downside in gold and gold stocks may not be over. My thinking is that the current events are VERY bullish for gold long-term but bearish short-term. Japan’s insane policy of currency debasement is forcing down interest rates (for now) and leading to a reach for yield (return) so gold might be under pressure as investors leave gold to pursue stocks.  Eventually, Japan’s currency will implode, leading to massive unintended consequences and a rush back to safety.  But, gold miners don’t necessarily need gold to go up, they need their inputs to decline more than gold, so their margins widen/stabilize. 

Also, gold should just be part, not all, of your portfolio.

P.S: ENERGOLD (EGDFF): Down and Dirty Analysis

Someone sent me this……sometimes the best ideas are the simplest.

Or even better, Energold. I am a proud shareowner. But emotions and will aside. Here you have a biz with 3 operations. Earnings power is the best way to look at it and most valuable, but let’s imagine we just sold for parts:

Dando (worth 3mm or so – bought for 300k or so plus put in working capital)
Bertram (paid 18mm for it. But EBITDA now back up in the low/mid teens – worth at least 30mm today)

Mining Biz (133 rigs, let’s be super conservative and say 250k per rig – so worth floor of 33.25mm)

Impact Silver Stake (3.8mm at today’s prices)

In addition, 91.2mm of working capital (incl. cash and inventories)
Minus the 43mm in total liabilities = $3+30+33.25+3.8+(91.2-43)= 118.7mm ($2.59 per share) vs today’s EV of 68.15 mm.

I am no genius – but that seems silly cheap to me. What’s more, earnings power is substantially higher, and the company is growing, and it has amazing operational leverage. Sure, results may not look amazing until they are back towards 5000k meters per drill annually. But even if they were to only get 3500 meters per drill @ 180 per meter (assuming cost per meter is ~138 per meter) the minimg biz is still FCF positive and earnings positive. And these are bad times. Bertram still doing fine, as is Dando.

Another good blog:  http://brooklyninvestor.blogspot.com/




Going For the Gold!


Gold is not a commodity; it is not an investment; gold is money. –James Rickards, Currency Wars.

My last post on gold and mining stocks for a while–I promise.

Gold stocks are trading at multi-decade low valuations on the basis of revenues, income, and earnings. However , gold stocks are today selling near their 22-year highs based on reserves. The market knows that mines are depleting assets, and companies are struggling to increase reserves. Plus, mining costs are rising-ttp://www.kitco.com/reports/KitcoNews20130326AS_cpmCash.html. We are talking about tough conditions for mining companies.  So if I can strike gold, I will be $$$. I hired the Indiana Jones of mining exploration stocks, Bob Moriarty, pictured above to find the gold. Do you want to invest?

No, I didn’t think so. You are an investor not a dreamy-eyed prospector or sucker-seeking promoter.  Gold companies can be divided into three broad categories: the major producers, the junior or developmental companies, and the explorers. Gold mining companies have been the second worst capital destroyers next to the airline industry, so I will have enough problems to find the right companies than venturing into the riskiest area of mining–exploration.

Hear what Mr. Moriarty has to say about his wild and woolly life (scroll down to listen to the MP3 interview) http://bullmarketthinking.com/bob-moriarty-when-there-are-no-more-sellers-left-you-only-have-buyers-we-hit-that-point-a-week-ago/

Moriarty: A comment I heard many years ago is that at every top there are a hundred reasons to buy and at every bottom there are a hundred reasons to sell. It sounds like one of those truisms that is too simple to understand. But when 99% of the people want to buy there are few left to buy; you must do the opposite.  We hit that point last week (Feb 22, 2013) in the junior mining stocks.

and/or read another here:Shelter From The Storm Bob Moriarty on Gold

Yes, tramping through jungles may not be your cup of tea but it beats the corporate life:

Studying the Market

Information sources:

http://www.321gold.com/   (Bob Moriarty’s blog)














www.tocqueville.com #1 Gold Fund




as well as the company websites of Rubicon, Eldorado, Romarco, New Gold, Franco Nevada, Barrick, Newmont, Angico Mines (AEM), etc. Luisten to the conference calls, view presentations.

Asking a mining company about the future price rise of gold is like asking a barber if you need a haircut. Wipe the gold dust away and study the contra-side:

Gold Bubble: Profiting From Gold’s Impending Collapse

Yoni Jacobs  Yoni Jacobs (Author)

However, unless REAL interest rates become positive and/or the currency wars stop, I don’t see how gold gets crushed, though the market may go sideways for who knows how long.

Ok, after this post we will get back to finding undervalued stocks like: