@nawatatweet

So I don’t really know of a magic formula for when to sell (cash out), but here are a few anecdotes and ideas to consider that have worked for me – both in the stock market and at the blackjack table.

Counting cards might work, playing the right table helps…. In blackjack you don’t win the game, you just have to win more hands than lose and bet bigger on winning hands than losing hands. If you were able to play enough hands and you play perfectly, your odds will approach pretty close to 50/50 win-lose against the house over time. But you would lose a fortune trying. The only way to win is to bet correctly and big when appropriate and cash out when you are up.

So, by my (good and lucky) many years of experience, the only bona fide way to win is to bet big and sell or cash out when you are up – even if you think it might too early.

How many times is your story, “I was up $50,000″ only to hang on till it was gone, and you had to quit the game because you had no more money – kind of implying that you “broke even” when you actually lost all the money you put in…?

You got to know when to hold ’em, know when to fold ’em,

Know when to walk away and know when to run.

You never count your money when you’re sittin’ at the table.

There’ll be time enough for countin’ when the dealin’s done.

Ev’ry gambler knows that the secret to survivin’

Is knowin’ what to throw away and knowing what to keep.

‘Cause ev’ry hand’s a winner and ev’ry hand’s a loser,

And the best that you can hope for is to die in your sleep.

– The Gambler, Kenny Rogers

• Even with a stock that is having some success – if it levels out and starts drifting lower AND they are running low on cash, consider selling (before they run out of gas) and buying back when they raise more cash. Financings are often done at a discount, are dilutive (weakens stock) and as said, needed in order to drill and get results. If they are not able to refill their fuel tank, and suffer engine stall, they will drop further, faster and you will have done good by selling beforehand.
• “Buy on rumour, sell on news” is an old one, but works!
• Sell (at least some) on an upswing when the stock surpasses your original target which takes discipline as you tend to re-fall in love with a stock as it goes higher… and,
• To assuage that anxiety of selling too soon, buy something tangible (and superfluous) with some of the proceeds of the sale. “if this stock doubles, I’d love to buy that ’57 Gibson” – if it does, do it! (plus, you can play a nice guitar for coins when you are broke)
• Sell if the company’s original theory is not working (not forgetting though that companies rarely hit on first hole, Hemlo was the 70^th hole…)
• Sell if your original theory is not working (need to sell, win or lose by certain date etc..)
• Watch for warrant exercise (price, deadlines) there is often a promotional push before expiry to get the stock in-to-the-money so they get exercised. Also be warned, by the same token, nearly all investors with warrants sell their stock in order to pay for the warrant exercise.
• Sell on volume days – either way, up tick or down tick, if there is a lot of selling, there are a lot of buyers and vice versa (needs to be otherwise it won’t trade)
• Utilize a seasoned junior mining stockbroker, someone who might have insight as to the brokers involved, selling habits etc. Bonus, these brokers also have a trap line to private placements that regular investors may not see.
• Stocks climb and fall in fits and starts, peaking on discovery and often level off until another as good or better hole confirms the discovery then levels off until other good holes delineate potential size and grade and may really level off as a resource is being calculated until someone buys them out. And, conversely, crater hard on bad news.  Sell on spikes up, even if it might eventually go higher over time.
• Choose your timing – triple your money in a month can be better than 5x in 2 years due to opportunity cost

Cash in if you are in the money. It isn’t a win until you sell!

Issuers are often misguided with their fixation on the bid side of their stock’s market, quite obviously hoping that “propping” their stock price up with bids will make it go higher – or, that investors that buy and hold their stock will help it go higher. This stratagem may work in the very short run, but generally backfires and reverts to the lower price (barring significant good news). By way of analogy, I suggest that investors offering stock for sale is what lets the stock price move up.

If you owned a shoe store and advertise (promote) a potentially hot new sneaker for sale, it would be good for business to actually have a bunch of those shoes in the back room to sell. Happy buyers leaving the store and walking around with the newest design can entice others to line up to buy, to the extent that you don’t need to offer any discounts to sell them, in fact you may be able to maintain a slight premium.

Conversely, if you promote the new shoe and actually don’t have any (or little) in stock, you may get away with doubling the price, selling a couple pairs and leaving most of the lineup of potential buyers empty handed.  Those potential buyers can walk away and not buy if they see the price run away, or drop out of line if they see that they may not even get a pair. These buyers can go somewhere else and get some competing new design that they can actually buy and show off around town.

As for propping up the market with bids – how far do you think you would get if you convinced a line up of buyers for those shoes without having any in stock to sell?

Hoarding the new shoes in an attempt to limit supply and increase their price is also a tactic that tends to eventually back fire. Someday that stockpile of shoes is going to come out for sale, inevitably at the wrong time and all at once like a fire sale when the next new shoe comes out…

In the stock market, each investor (punter) has different entry/exit points according to their own financial strategy or budget. So ideally, not always possible; the early seed shareholders who take more risk early on and don’t mind the early-stage wait, sell some stock (at a profit) as the company makes progress to those that rather pay a higher price with a little less risk. For every buyer, you need a seller at reasonable prices that buyers are willing to pay. At some price point the buyers will stop buying and without buyers, the stock stops moving up.  Junior exploration stocks never drift up, they fall.

As an opening post – full disclosure, I am an insider and currently hold management positions in publicly junior resource companies and a resource investment fund as well, am a consultant to several other publicly traded companies. I have spent a good part of my career as a stockbroker trading and financing junior stocks but am not currently licensed in any jurisdiction to give financial advice. I hope these posts and anecdotes from my experiences will be both entertaining and helpful to all those keen on junior stock speculation.  Please read full disclosure on my home page.

Here, I am specifically talking about the junior exploration and development companies – those penny stocks that trade largely on the TSX Venture Exchange. To simplify wording, I’ll refer to junior gold stocks. Largely, what I have to say applies to gold, silver and certain other commodities. Silver, in particular, acts and reacts similarly to gold with some important differences (more torque!) and I would refer you to a guy like David Morgan, to whom I go to for his insight on macroeconomics, silver and gold.

Junior gold exploration companies are not an investment in gold.

While obviously correlated to the price of gold, the explorers are a different animal, pure speculation, and like bets tend to have a single outcome – a win (discovery) or not. The odds are inordinately low on making a new discovery and the probabilities not entirely predicated on geology.

So why is it time to buy junior gold stocks?  Quite simply, after several, long dry years, some exploration stocks and stories are now getting financed – the only chance they have to go up in stock price. 

How or why do junior exploration stock prices move up (or down)?

The things that make stocks move up:

1. More buyers than sellers – think of it as people placing bets before a horserace is run.
2. Promotion – companies need to “advertise” their story, there is an overabundance of stories for investors to choose from. Which upcoming horserace to bet at – which horse to bet on
3. Anticipation of results from activities that could lead to, or add to a discovery, like drilling and assays.
4. Stocks often move up and trading more active as drilling gets underway and especially just before results are released.
5. Stellar results – if the (drill) results are better than generally anticipated, investors may pile in, largely in anticipation of next results. In other words, they may not have bet on the previous race, they are betting on the same horse for the next race it may run in.

All of the above requires money. No money, no promotion, no drilling, no results. Don’t bet on a horse that is not running in the race.

Superfluous but somehow so often forgotten – junior explorers have no earnings, income, or revenue. No matter how much stock a person buys on the stockmarket of a particular company, it will not provide the company with the money they need to drill holes, run exploration, or do promotional activities that can drive a stock higher (although it may move the stock price up, which may in turn help the prospects for raising funds). 

The only way (almost) for junior companies to raise working capital is to issue and sell new stock from its treasury (ie private placements), which in itself inevitably leads to a long drawn out demise and a restructuring reset that often decimates the previous investors and shareholders if a discovery or other meaningful event doesn’t materialize within a relatively short period ( a few years?).

In my career, I’ve only seen a few periods where the juniors were being funded and discoveries made. I had just missed the staking rushes around the Hemlo, Eskay Creek, and Ekati discoveries in the late ’80s but for me, I began in the ’90s and Arequipa, Voisey’s Bay and Bre-X come to mind with a few smaller up-markets in the mid-2000s, around 2011 and again around 2016. 

The availability of venture capital for mining exploration is limited at best – there are always new ventures with promises of 10 baggers vying for punters’ money. We natural resource explorers have suffered many years (decades) with bare glimpses of funding coming in other than a few limited, short-lived blips.

Well – as the shine has come off of some sectors like marijuana stocks – gold ($XAUUSD) and gold mining stocks ($GDX) have performed well with exploration stocks getting financed from the latter half of 2019 leading into (portending?) the broader market highs and the steep crash in March 2020.

Now, whether it is because of the extraordinary governments’ policy reactions to the C19 pandemic feeding risk assets (SPX and Nasdaq at all-time highs and valuations) or the fear of a currency/financial/economic crisis caused by the unprecedented government money printing, junior gold stocks continue to get venture capital funding. 

For the TSXV (including NEX) there was a 35% increase in the total amount of financing dollars raised and a 17% increase in the total number of financings in Q1/20 over Q1/19. Although for March 2020, during the market crash, the number of dollars raised on TSXV decreased by 26%.

Total financings raised in May 2020 increased 136% compared to the previous month and was equal to May 2019. There were 118 financings in May 2020, compared with 80 in the previous month and 126 in May 2019. 

Additionally, over the past year or so, a (very) few companies have garnered working capital by way of joint venturing with, or being financed by larger mining companies that actually have cash or cash flow, and for a few dozen (fortunate) companies, funding came through by way of investments from fellows like Eric Sprott, definitely one of the best known, most successful investors in the junior gold and silver space.

So, looking back over the recent short term, SOME companies are funded or are being funded to do the work such as banging rocks and drilling to potentially drive their stock prices higher. The junior exploration stocks have a lot more torque than their bigger brethren, so higher can mean a lot higher and faster than the price of gold or gold producers (junior and senior). 

From this chart of GBR vs the gold price (2yr %) we can see a few couple of things:

• A dramatic difference in percentage terms over the whole 2-year period
• Larger, short-term gains and losses compared to the gold price
• When GBR hit its first big hole, the stock went up nearly 4X in just a few days and 6X in 2 months 
• Stock gains are preceded by financings which funded drill holes and their results that in this case were successful

What’s THE risk then?

The biggest risk is that all juniors are not getting financed, there are way more juniors than dollars willing to bet on them. The TSXV has over 1,600 listed companies of which more than half are junior resource companies. Those that cannot raise more money than just to stay alive have very little chance of their stock price. Simply put, not all companies get financed to do the things that make the stock go up. It’s a stock picker’s market – the price of gold does NOT float all boats. No money, no promotion, no drilling, no results. Don’t bet on a horse that is not running in the race.

All the other risks

• Risk from the risk above: continual printing, and diluting company stock to fund the next hole. Arequipa is famously said to have made the discovery hole on the very last hole they could afford to drill before giving up.
• Risk by the drill bit. Hemlo took 70 drill holes before the discovery hole and some 120 holes to delineate a bona fide deposit (maybe $30-$40 million in 1980 dollars and several years).
• Risk that the broader market crashes again (are we in a bear market rally?) equities sell-off, gold does what it is supposed to do, store value and sells off to pay for irrationally exuberant (stemming from irrationally exuberant risk asset inflation) losses, gold miners sell-off, risk appetite disappears and funding for exploration disappears.
• Political/country risk. Discovery made and taken away by the government or government agencies – eg. Las Cristinas, Venezuela (Crystallex); Tambo Grande, Peru, (Manhattan Minerals), and yes I was involved with both.
• Poor corporate structure. Because companies must continually print stock to raise money, unless it is well orchestrated and structured, the capital structure can rapidly turn hyper-inflated (there it is again #Fed) with the number of shares (shareholders) increasing so much so rapidly that even a discovery doesn’t move the needle for shareholders.
• Bad management. This can be a number of things including outright crooks (Bre-X, Cartaway) or well-intentioned but unbalanced fiduciary duty to shareholders like an inordinate focus on geology (like a science experiment) or the opposite; too much emphasis on capital markets without the backing of geology. Management is the key to any corporation but is even more relevant to a business that has no revenue, spends bettor’s money on long shots with bettor’s money producing nothing but a piece of paper. This is a tough corporate mandate to manage – a lottery company that prints tickets and more often than not, shuts down before it can announce a winner. 
• Bad trading habits or just bad luck. Junior stocks have their own cycles within the broader cycles. They can move up or move down in huge percentage terms very quickly or sit and drift down. It’s difficult for a junior explorer to produce ‘a little less’ results in slow times and progressively more during better times. They don’t produce anything, they poke holes looking for gold and either hit or they don’t. No money, no holes. The money you bet on a horse that can’t run (no matter how good it is) is lost money.

So, is it time now to put money at junior, gold exploration stocks and stories? I say yes. Just understand that it is a bet, not an investment.

Suggested sources from Twitter and ht/thanks:

David Morgan, The Morgan Report, for macroeconomic views, in-depth information on silver and gold and ideas in large cap and some small cap stocks. Find him here: @silverguru22 on Twitter (disclosure, follows OMM)

Peter N Bell, for his editing and vast vault of information, Find him here: @PeterNBell on Twitter

Without their permission, I suggest (to which I’ll add more) to follow a few of the following on Twitter:

Lawrence Lepard, find him here: @LawrenceLepard macroeconomics, US & world policy, gold and buy-side investment commentary

Chris Temple, find him here: @natinvestor Macro with a bite and ideas from large cap – small cap – ETFs and trading. (disclosure, follows OMM and FNR)

Danielle DiMarino Booth, find her here: @DiMartinoBooth. Monetary policy, economics and finance – 9 years at the Federal Reserve Bank of Dallas, author of “Fed Up, an insiders take on why the Federal Reserve is bad for America”

Willem Middelkoop, find him here: @wmiddelkoop The author of “The Big Reset”. Macroeconomics, foreign policy, mining and gold. He is PM of the v. successful Commodity Discovery Fund (The Netherlands)