With miners showing the best risk/reward opportunities I have ever seen across the board it makes it much harder to decide which companies to put more or less money into. A few months ago when valuations were higher there were maybe 5-10 absolute no brainers that I was aware of. Today I think I have something like >30 companies, that I am even aware of, that I would consider to be no brainers. Because of this my portfolio is more diversified than ever simply due to the fact that I am not really sure if the 5th pick has worse risk/reward than the 15th pick. In other words I don’t feel like I am leaving much money on the table by diversifying since the valuations are so low on average that more companies than ever look like “no brainers”. In a richly valued market environment it is much harder to find no brainers obviously and that is why I usually have a very concentrated portfolio…
I am a bit of a perfectionist when it comes to investing in the sense that I always want to think, think and then think some more until at least a few of the companies on my Watchlist come out as the clear and most rational bets. At this point in time, with >30 opportunities might be considered no brainers, I have a harder time than ever to decide which ones are the best of the best. In all honestly I think I would be able to crush the index by simply putting in equal amounts into the 20-30 no brainers I have on my watchlist but that is simply no fun for me. It’s the theorycrafting and going over cases until I get some kind of “Eureka moment” that I find really stimulating.
For example lets say you have two junior explorers with an Enterprise Value of US$ 10 M each. Both have similar sized high quality projects, in similarly good jurisdictions and both have 300,000 ounces of inferred resource. On surface they might look like identical no brainers, make you stop right there, and simply put equal amounts into both companies. This makes sense and it’s probably a perfectly good idea. However, I personally hate the idea of generic or “lazy” investing/speculation. It’s simply not fun enough for me. I don’t love investing simply because of the opportunity to generate wealth. I see it as a game that I want to be the best at and money (performance) is just a way to keep score. This can often lead to me becoming impatient and trying to be too fancy however. But in the big scheme of things I think it has served me well since my portfolio has outperformed the HODL portfolios I manage for family members and friends.
Anyway, back to the two “identical juniors”…
Even though the two juniors seem to have about the same risk/reward there might be many factors that significantly skews the actual risk/reward one way or another. Consider the following:
- Does one junior have a higher quality (potential) deposit?
- Maybe slightly higher grade
- Maybe slightly better recoveries
- Maybe slightly better strip ratio
- Maybe slightly lower expected CAPEX
- Does one junior have other things going for it?
- Maybe slightly better infrastructure
- Maybe a slightly better team
- Maybe slightly better access to capital
- Does one junior have more exploration potential?
- Maybe one has a deposit type that tend to be very large
- Maybe one has a deposit type that shows up in clusters
- Maybe one has a deposit type that get better at depth
… If the net result is that one seem to have a lot of advantages over the other then the actual risk/reward difference might be huge and one should invest on a 9:1 ratio instead of 1:1. Keep in mind that this does not put a lot of weight on the advantages of diversification.
What are some mental exercises one can use to flush out the “first among equals”?
One “game” I enjoy is to think about what I would do if I had only $5,000 to invest and I was only allowed to buy ONE company. Then you can just simply do a “King of The Hill” type elimination exercise like so:
Compare company A and B then decide which one you would put that $5,000 into if you had to chose one. This forces you to focus on the scenarios you see play out for both companies and consider the strengths, weaknesses, pros and cons.
Then if lets say company B wins you have it go up against company C etc etc. In the end there will be one company that has beaten every other company on a at least a relative basis. This company should probably be the one which you put the most money into. Then you can just redo the “competition” and figure out which should be your second, third and fourth largest positions etc.
I did an experiment like this when I opened a new account with a new broker and just put in a small sum of money with the goal of maximizing my returns (obviously). Since it was such a small sum I didn’t get the urge to diversify since I needed a big return in order for it to even have any form of impact. In other words I wasn’t keen on buying IBM for a 10% return in two years. I ended up buying a tiny grassroot explorer which I thought was way too undervalued given the company’s significant land position in a very hot area. After it revalued I put all the money into another grassroot explorer which had a large land package, very promising soil samples and was a real sleeper stock. In a month or so this one rightfully revalued higher and I sold. That was the end of the experiment since I needed the money for a PP but I think it is a very valuable concept to consider.
Anyway, I think it can be helpful to help one flush out the strengths and weaknesses of different cases. One might be similarly bullish on two stocks with similar Enterprise Values, but if one is forced to choose between them, one might realize that one of the cases is clearly better from a risk/reward perspective.