“At the start of the bull market we have all the paper and they have all the money. At the end of the bull market we have all the money and they have all the paper”.
After a 12yr stint as a client advisor I found the most successful speculators were those who were able to take a “contrarian” view whilst learning to overcome their emotions. Whilst the opening quote may be more suited to the orange juice frenzy in Trading Places it is all about “buying low and selling high”.
Sirius Resources (SIR) has been the star performer for 2012 and early 2013 and has shown us that high risk/high reward exploration can certainly pay off even when you are low on cash and hope. On July 26 2012 they announced a major new nickel-copper discovery that defined a potential new province. In a dire market the initial reaction was subdued with the shares racing to 24c-24.5c before dropping back to 19c and stopping out many who had rushed to get involved. The SIR story continued to build with further strong results (including the Bollinger discovery), and the share price reached an all-time high of $5.00 in March 2013. With SIR came the resurgence of “near-ology” and juniors such as BUX, SFX, MAT, ENT, BFE and others all benefited from being in the same region regardless of their exploration potential. SIR also allowed Boadicea Resources (BOA) to get their IPO away with their 20c shares reaching a high of 70c in November 2012.
In one of the worst junior resource markets SIR has seen its 5.7c shares soar to $5.00 and not only has it benefited those directly involved, it has shown that greed is still very much alive and well and a whiff of another major discovery, will see the FOMO brigade vowing not to miss another Sirius after many were still regretting not charging into Sandfire (SFR) in what also a diabolical market for juniors.
In exploration you need some luck and, hearing numerous slightly altered versions of how Sandfire stumbled on Degrussa it pays to be persistent and take on that dare of “Drilling a deep hole in search of poddy gold”
Unfortunately with all the excitement and upside comes the negatives and sentiment has now turned nasty to the junior explorers after many inexperienced traders seeking their own instant wealth found their way into the “lobster pots” with failed trades on other high-grade hits and near-ology plays that didn’t quite work out.
Regardless of the lack of positive sentiment the Australian junior resource sector is now offering some of the best value I have ever seen since I took an interest in early 1994. Throughout my career in speculation there have been a number of occasions where the entire sector has appeared to be “stupid cheap”. One of the most memorable for me was around the Asian crisis in 1997 that took hold in July. I had finally had access to the market through a Palsonic Teletext TV (with rabbit ears) and watching prices on rotation I was able to ascertain that the junior resource sector was undergoing a nasty correction.
From 1994 I built my knowledge through constantly asking to be tested on share prices from the newspaper and attending the ASX in Sydney to converse with other speculators. These days with over 2,220 listed companies the information is quite difficult to read due to a drastically reduced font size and the bizarre step taken by The West Australian in particular to list all companies in alphabetical rather than separate them into industrial and mining/energy.
After deciding to leave the NSW Police Service I travelled to Perth armed with a pen and notepad and walked the West Perth grid that pretty much houses the entire Australian junior resource industry. I interviewed around 20 Directors, geologists and company secretaries and after having it bound I was able to secure an advising role at William Noall on “The Terrace”.
Leading up to the Dotcom bubble the major trading activity surrounded Optus Warrants (CWO’s) and although I began to build a large position for clients in BeMax Resources (former ASX: BMX), once the NASDAQ started to really move it was sheer mayhem as the bombed out juniors from the Asian crisis all rushed to backdoor in any Dotcom/tech related entity or ideas to avoid being left behind. Suddenly “fear” morphed into “the fear of missing out” and I witnessed some companies increase up to 300 times in value. New IPO’s were also all the rage and 200% to 500% returns on day one were not uncommon. The catch was that you either had to be a highly regarded client of a major broking firm or a small investor lucky enough to be approached for shareholder spread.
During this period of madness my client base increased five-fold and I eventually was writing >$100,000 in commissions which at times was the average yearly wage in around three weeks. Apart from the stupid amounts of money being thrown around, the greatest lesson I took away from the Dotcom bubble was learning about fear, greed and how my clients were handling the emotional ride of a speculative bubble. I look back at my policing and advising career as almost 20 years of pure psychology and I will look to provide subscribers with as much insight as possible as share prices recover from their lows (and they will!).
Since Dotcom there have been a number of mini-bubbles in retractable syringes, childcare centres, boutique breweries, coffee shops, juice bars, potash, phosphate, nickel, molybdenum, real estate, rare earths, coal, iron ore, lithium and regional exploration spikes in Cloncurry (QLD) and Doolgunna (WA) when Sandfire (SFR) eventually saw its share price >$8.00 after struggling below 6c during the GFC.
The only sector that came remotely close to Dotcom was uranium which saw Paladin (PDN) explode from 0.008 (8/10’s of one cent) to over $10.00 as speculators frenzied over any junior that was pegging ground or even considering looking at going nuclear. Whilst there were some major success stories such as Mantra (MRU) and Extract (EXT), investors were hammered in similar fashion to the Dotcom bubble once buyers were exhausted and the sector came crashing down. Regardless of the lessons apparently learnt in late 1999/early 2000, human nature again dictated terms as many flocked for their slice of the uranium action as they felt completely safe doing so as part of the herd.
The most recent bubble dominating Australian TV is sports betting which continues to roll on as a major incentive war escalates. Now if your team is ahead at half time but loses you have a chance of perhaps getting your money back. I admit to having a soft spot for TAB Sportsbet only due to the fact I like seeing how the fresh faced and attractive Jamie Rogers hair styles are evolving. Flat, curly, in a bun or even wearing a hair piece it is my brief escape from reality. Free bets, promises of the best odds, three strikes, and now refunds based on the size of the crowd it is a sure fire sign the bubble is maturing. The reported $500m bid for Tom Waterhouse’s operation might be the ringing of the bell, but with human stupidity infinite the sector might grow legs and wings.
Being previously addicted to smoking, poker machines (cardies and the flashing hearts), horse racing, and day trading I am not going anywhere near sports betting regardless of the fact I enjoy analysing both AFL and NRL. My Saturday’s spent at the Glenrose TAB are now well behind me and no doubt my children are now looking forward to the series of lectures heading their way. No smoking, no tatts, no exotic bets or dancers (at least until they are 18) and my children will be half way there with their futures.
One of the most ridiculous bubbles that has swept the world has been GANGNAM STYLE which stormed past 1 billion hits on YOUTUBE. Even sillier is the HARLEM SHAKE which just like the other display of stupidity (planking) has cost people their jobs and hope of a future career. The world needs some respite from the current heat on the Korean front but why not a return of the yo-yo or producing a range of Game & Watch toys where we aren’t forced to pay $100 because they are now vintage.
During the Dotcom madness and other mini-bubbles the major barrier for investors was their addictions. It was all about the adrenalin of a short-term trade, rumours of a major hit, or the romance associated with an anonymous post on Hotcopper. Once you are addicted to the over hyped rubbish on the market it is near impossible to go back. On many occasions it was a more a case of “wrong person” has opposed to the “wrong stock”.
From my experience I have learnt that the following does not work over the long-term when it comes to speculation remembering in a bubble that almost everyone is a genius:
Technical analysis (You either believe it or you don’t and I don’t, even though I am mindful that chartists will influence prices up, down or sideways). Without willing buyers chasing stocks on momentum or having them panic once stop losses are breached it would be difficult for position builders such as myself to get set at the right price.
My most successful clients over the long-term were able to:
To assist in putting together a speculative portfolio, rather than reading hundreds of books, attending courses and subscribing to every newsletter (apart from mine) I am suggesting that the following three books will be all you need providing you are slightly reasonable and possess an inkling of common sense. I would suggest reading them in the following order:
1. The Winning Habits of Warren Buffet and George Soros, Mark Tier
2. One Up On Wall Street, Peter Lynch
3. Devil Take The Hindmost, Edward Chancellor
If you take nothing else away from this article the following site is a great place to pick up these titles and others www.bookdepository.co.uk
Building a Speculative Portfolio
It may of taken some time to get to this point but I felt it was necessary to provide some background information and insights on my methodology and how speculation is all about people and how they behave rather than complex computer programs. I treat the junior resource sector as a “battle” between, shareholders, daytraders, quick buck artists, company directors and ultimately the toughest of all in dealing with your own emotions of fear and greed with the occasional dose of stupidity thrown in. Here are five juniors that I consider worthy to consider when constructing a speculative portfolio. Not only do they offer the potential for share price upside, it is the on-going education that could be most valuable in identifying similar companies and learning how to negotiate risk and reward analysis.
I am going to start off with the “Sensational Six” and then work my way through some more highly speculative opportunities to spice up the portfolio. (For the full stock list and to learn more visit locantro.com)
Minotaur Exploration (MEP) 14c
Chinalco Yunnan Copper Resources (CYU) 7.5c
Octagonal Resources (ORS) 12c
Red Metal (RDM) 16c
WPG Resources (WPG) 8.7c
Chesser Resources (CHZ) 20.5c
Silver City Minerals (SCI) 11c
Some Further Tips
Risk and Reward Analysis
Once the stocks in the portfolio start to move I would expect that anxiety levels will increase and the major risk will be selling too early has we have had far too long to adapt to these stupidly cheap valuations. During the more mature stages of the Dotcom bubble I learnt to adapt to share prices and market capitalisations that appeared reasonable to those immersed in the sector but appeared ridiculous to me. As share prices move the key is to be able to apply risk/reward analysis to each situation without becoming attached to the stocks more likely to drop considerably or as a best case go sideways which is effectively “dead money”.
As the market improves (and it WILL) my aim is to provide my subscribers with further insights into how I go about applying risk/reward analysis to the companies I follow, that will ultimately dictate where the red arrow lies in the valuation bar in my TFIF updates. Subscribers should remember that “Fear is temporary and greed is perpetual” and more importantly that “Human stupidity is infinite”.
Speculation whilst potentially rewarding is also extremely dangerous and although Locantro’s Life is all about making money in order to do this some of the risks must be removed or mitigated and buying low has always been an excellent place to start.
Tony J Locantro
About the Author: Tony Locantro is the Managing Director of Locantro Capital Pty Ltd, Locantro Asset Management Pty Ltd and Gold Australia Pty Ltd. He entered the stockbroking industry in 1998 and was an Associate Director at Patersons Securities Limited until 2010. In 2001 he authored The Green Room: A Guide to Speculating on the Australian Stock Market and is the current author of the newsletter, Locantro’s Life. He has been quoted extensively in the financial press and Dow Jones Newswires, has written articles for Kitco and other websites and also appears as a regular panellist on Your Money Your Call (Sky Business News). He is known as a passionate and respected supporter of the junior resource industry.
Disclosure of Interest: Tony Locantro, his companies, employees and associates may have personal interests in the majority of the companies or sectors covered in this article.
Disclaimer: This article is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular reader have not been taken into consideration. Individuals should therefore discuss, with their financial planner or adviser, the merits of each recommendation for their own specific circumstances and realise that not all investments will be appropriate for readers.
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Locantro’s Life is designed for speculative investors. Subscribers should ensure they consider their risk profile as speculation is the highest risk investment.
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Locantro’s Life is a publication issued by Gold Australia Pty Ltd (ACN 131 793 416) who is an authorised representative of AustAsia Financial Planning Pty Ltd AFSL 229 454.
Gold Australia Pty Ltd has made every effort to ensure the reliability of the views and recommendations expressed in Locantro’s Life. Gold Australia Pty Ltd research is based upon information known to us or which was obtained from sources which we believe to be reliable and accurate at time of publication. However, like the markets, we are not perfect. Locantro’s Life is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular reader have not been taken into consideration. Individuals should therefore discuss, with their financial planner or adviser, the merits of each recommendation for their own specific circumstances and realise that not all investments will be appropriate for all subscribers. To the extent permitted by law, Gold Australia Pty Ltd and its employees, agents and authorised representatives excluded all liability for any loss or damage (including indirect, consequential or special loss or damage) arising from the use of, or reliance on, any information with Locantro’s Life whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Gold Australia Pty Ltd and AustAsia Financial Planning Pty Ltd hereby limits their liability, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.
Disclosure of Interest
Gold Australia Pty Ltd, AustAsia Financial Planning Pty Ltd, its Directors, employees and consultants may have personal interests in the majority of the companies covered in this report (both direct and indirect).
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