Mining Sector: Risk/Reward
During corrections as we are seeing now there are a lot of people who get nervous and sell out due to fear that miners could go lower (get cheaper).
At the same time we know that the macro and fundamental backdrop for mining is very positive long term.
One also sees Technical Analysts discussing whether gold will hit say $3,000 or $8,000 by 2023 etc.
It’s said that 95% do not beat an index in the LONG TERM.
Most of peoples comments I see on twitter about investing decisions are based on what the writer expects to happen within 0-3 months.
When the price of gold rallies for a few days a lot of the commentary is about what the next target higher is (makes people want to buy).
When the price of gold sells off for a few days a lot of the commentary is about what the next target lower is (makes people want to sell).
Needless to say the sector commentary can often be like a buzz saw from week to week (bullish->bearish->bullish).
Consider that gold is destined to go up in the long term thanks to the finite nature of the business if nothing else (pressure to the upside).
Also consider that 2023 is not really far away and that $3,000 or $8,000 gold are both very good numbers.
Also consider that junior miners are currently priced like gold was trading at lets say $1,400-$1,500 even though (paper) gold is currently trading at $1,750.
- Pressure is to the upside for the price of gold
- Junior miners are pricing in a lower gold price than gold is currently trading at
- Gold could hit $3,000 to $8,000 within 2 years
If I am buying juniors for less than what they are worth it means I am getting a margin of safety. I am buying something that is already pricing in a lower value of the business relative to the price of gold than it currently is worth. In other words the price of gold could go down quite a bit without me having to have bought high from a fundamental stand point.
If the long term pressure on gold is to the upside and there is even a 50% chance that gold will hit a number of $3,000 to $8,000 per ounce within 2 years then that means there is a 50% chance that the current junior valuations would be extremely undervalued today relative to their intrinsic worth just two years away.
Why on earth would one try to think short term and be trying to trade every up and down?
Why not simply be content with knowing that:
- One is buying something cheap TODAY
- Margin of safety to the downside
- One is buying something cheap TODAY that will probably be EXTREMELY CHEAP within a few years
- Tremendous upside within a few years
Theoretical Risk/Reward proposition:
- 50% chance that gold goes down within two years and if so it needs to go lower than $1,400 for me to have bought miners “high”
- 50% chance that gold goes to $3,000-$8,000 within two years and my juniors will be up 300%-1,000% on average
- = Disgustingly good Risk/Reward (Expected Value on my portfolio)
… This is why I am not thinking of selling a single share regardless if the whole twitterverse is screaming that gold is going to go down in the short term. I am not rich enough that I can walk away from such a risk/reward perspective even though there might be a lot of short term pain that I will have to endure before the case is played out.
The hardest thing to do is to be right in the short term because there is so much noise. Buffett likes to say that markets are voting machines in the short term and weighing machines in the long term. Even the sector with the most favorable supply/demand picture can have multi-month corrections. It’s the big trend that leads to the big returns and there is no market that trends in a straight line regardless of how right one is or how solid the case is.
When one focuses on the short term and get influenced by the short term gyrations it is easy to forget what the actual long term case is.
The junior sector today has the best Risk/Reward I have seen in 6 years. Why?
Because if I am buying something that is cheap TODAY then it means I am buying something with margin of safety.
If the long term case is also beyond solid then I am buying something that is likely to go higher in the long term.
… How on earth do you make a case to sell such a security except out of fear and/or an effort to try and trade every short term gyration?
I certainly can’t see the any good risk/reward in selling a no brainer investment from a long term perspective in order to try and be fancy by attempting to guess where the market is going in the short term (which is notoriously difficult). It becomes even more difficult when factoring in all the noise on twitter that influences people to buy, then sell, then buy, then sell each week.
I like to try and help people and I consider myself a value investor. I try to focus on the most rational cases from a risk/reward perspective and I try to preach an investment strategy that is simple and has worked for me. I don’t try and guess where gold is going tomorrow. I cannot make a good case for miners if the holding/investment period is one month. I simply have no idea what the voting machine will take miners within such a short time frame. I can however make the best case I have ever seen in financial markets if the investment period is two years or more. The longer the time frame the more sense gold and miners make…
- Gold because the financial system gets worse and worse each year
- Miners because the industry depletes much more gold than it brings new supply online each year
… The result is the biggest no brainer case I think I will ever see in my life. Thus my whole equity portfolio is in miners and my investment period is however long it takes for this no brainer case to play out. In the meantime I don’t give two shits if gold goes to $1,900 or $1,600 by year end… Because it inevitably will go a lot higher.
Short term trading = Wasting your life by playing an extremely hard and pointless game for small returns IMO.
Oh and forget about the people who think one needs to show immediate profit to be right. They are clueless and will not beat a given index over the long term.
Intrinsic downside in the avg junior if #gold goes to $1,100 = -50%
Intrinsic upside if gold goes to $3,000 = +500%
— TheHedgelessHorseman 🏇 (@Comm_Invest) August 9, 2021
The Hedgeless Horseman