Mucking out the Stables - the Distractions of carrying Poo in your Portfolio and how to avoid such Excrement
Firstly, I must apologise for the Title of this Blog - I realise it is rather graphic and probably could put you off your Lunch/Dinner. I suppose you could say it is Wheelie’s Dirty Protest against the horrible Turds which I have allowed to foul up my Portfolio.
Perhaps such odorous writing comes from the fact I had a small Alcohol Injection just before I started work on this Blog. I figured that it was only a swift pint and that the effects of it would wear off as the Blog typing progressed. It was only a pint of ………..hang on, let me go and check the Recycle Bin……..(clearly audible whizzing sound at this point while I roll down the hallway)……….ah, yes, it was ‘Marstons Strong Pale Ale’. When I selected this Bottle, my mind saw the words ‘Pale Ale’ and the image conjured up was of something rather easy and mild. The reality is that it is 6.2% Alcohol by Volume, so maybe I should have paid more attention to the word ‘Strong’.
Anyway, the booze is in the system, so I will just have to use the lack of inhibitions to ensure this Blog flows with ease - both for me as the Typist and for you as the Reader. In reality it should be straightforward to write as many of the concepts covered in this Blog I have already Tweeted out in chunks as I have been thinking about the subject area; which is about clearing the Kaka out of our Portfolios - and this Blog brings it all together.
Earlier this week, I had a big clear out of 5 Small Resource Stocks that I have held in my Portfolio for several Years and they have been an utter disaster. The 5 stocks were:
When you combine the results, I lost about 80% of the Money I Invested in these Stocks (‘Invested’? Don’t make me laugh Wheelie, more like ‘DisInvested’, you muppet), and clearly that is not the way to build Wealth and ensure Financial Freedom. I have already written before about my dislike of Small Resource Stocks, and you can find that Blog here:
And I must apologise again, because I suspect that some of what I knock out in this Blog will repeat some parts of the earlier Blog - but this stuff is extremely important so this is hardly the most sincere ‘Sorry’ you are going to get from me !!
I have had many Months to dump these Stocks, so why did I let them continue to drift down and erode my Money?
It is pretty obvious to any Reader that I suffer from the ‘Loss Aversion’ Psychological Bias. I have written many times about how I have a constant mental battle with the idea of using Stoplosses - centred around a clear understanding of why they are helpful, but finding in practice that they are more of a hindrance to my way of Investing. I am coming round to the idea that Stoplosses only really make sense as part of an all-round Trading Methodology of which they are an intrinsic part. The kind of Approach used by @stealthsurf on Twitter exemplifies this concept.
My experience of the vast majority of Stocks that I invest in is that if and when they suffer a period of Bad Trading or the Share Price just gets in a bit of a Downtrend for no real fundamental reason, they nearly always recover. In fact, it is more an Opportunity that a Curse - it is often the case that I top up when these Great Stocks fall on tough times and I am able to take advantage of real Bargain Prices.
However, it needs to be realised that when I say “the vast majority of Stocks that I invest in“, I am being very selective. If you have ever had the misfortune of bothering to glance at my Sister Website WD2 (www.wheeliedealer2.weebly.com), you will see in the WheelieBin a clear list of the types of Stock I tend to avoid and this means that I generally invest in Real Businesses with such rarities as Growing Revenues, Growing Profits, Strong Balance Sheets, Fair to Low Valuations, Decent Dividend Yields etc. If you invest in these kind of Quality Stocks they can take some tough times in their stride and recover after a period of sogginess.
Let’s be clear - something that loses Money is not a Real Business.
The Nub of the problem with Small Miners and other Small Resource Stocks like Oil Companies and Agriculture Commodity Companies is that they often have no Revenue Streams whatsoever and they certainly don’t have Profits and/or Positive Cash flow - these things are horrendous Cash Burners. On this basis, it was clear to me many years ago that these Miners would face tough situations going forward but they appeared to have individual Stories that supported the Bull Case and it seemed worth holding on.
For instance, EMED is reopening the Rio Tinto Copper Mine and Production will start soon - it’s a great Story but the Copper Price meltdown will trump any other News over anything other than Trading Periods of maybe a few weeks. Experienced and Disciplined Traders will be able to make money on any Spikes from such News, but the vast majority of People in these Stocks will lose their Money.
I now realise how stupid I actually am. All these Stocks have ‘Stories’ that seem credible enough, but the reality is that every hour, every day, every month, every year, they are just burning through Cash and even if they have theoretically the Largest Gold Deposit in the World, it isn’t worth anything to the Business if they do not have the Cash Financing and Time to get it out of the Ground in a profitable way.
If you have ever watched the utterly brilliant ‘Gold Rush’ on Discovery Channel on your Tellybox, you will have a much better understanding of what it actually means to get Gold out of the ground - and obviously this applies to any other Mineral that is stuck in the ground. The thing that hits me every episode is just how much goes wrong - Machinery breaks down; things wear out; Stones clog up Sluicing Machines; Rocks break the Shakers; the Deposit turns out to not be uniform and the grades are terrible; the ground is frozen below a certain level and they cannot get at the Gold without huge cost; Pumps fail for the Sluicing Water; Lorries crash into other Lorries; Lorries fall off cliff edges on narrow roads to remote Mines; Claim Owners pull the plug; Claim Owners up the Royalty Rates; Workers throw a paddy and walk off the Mine; Illegal Miners work the Mine in the off-season; Rebel Gangs raid them with Kalashnikovs; they run out of Beer.
OK, you get the picture, a lot goes wrong.
There is another way of thinking about this. Why on earth are we as Private Investors being given the chance to buy into these Mining ‘Opportunities’? The sad reality is that we are being totally exploited. If the Mine was actually any good, the Big Boys (Major Mining Companies like Newmont Mining, Goldcorp, BHP Billiton, Rio Tinto, Glencore, etc.) would have already bought up the Deposits. The real position is that the Big Boys aren’t interested because they doubt the Deposits can be got out profitably - so us Mug Punters are used to fund the initial Exploration and Development work and if there is actually something good here, you can be mightily assured that the Big Boys will suddenly get interested and will take the Deposit off our hands before we can get any gains out of it.
These Stocks are for Short Term Traders, they are not for Long Term Investors - in the Long Term, most of these Companies will be Bankrupt. It is instructive to me that the Legendary Robbie Burns, The Naked Trader, rarely invests in such Stocks and makes it clear in his Books that they are not a good idea. I really should have taken notice - there is no excuse !!
In future, if I ever am dopey enough once again to buy into such Rubbish, it is vital that I use a Stoploss - probably something like 20% from my Entry Price would be appropriate. This kind of thinking also applies to any Stock that sits in my WheelieBin on WD2 - these things are Very High Risk and a Stoploss is vital. God, I so wish I had realised this before - not only have I lost a lot of Money, it is also the Opportunity Cost of not investing the Money in something of Quality and compounding the Gains like I normally do - it has been ‘Dead Money’ in every sense of the words.
It is worth nothing that I see Small Pharma, Small Biotech and Loss Making Start Up Tech Stocks in the same way - use a Stoploss if you must dabble in such Speculation (note my choice of word, you are fooling yourself big time if you think buying such Stocks is ‘Investment’ - Gambling is an alternative word that would fit !!).
It is easy to get sucked into these kinds of Very High Risk plays as Bulletin Boards and Twitter and suchlike are rife with people who claim they have made 500% on this Stock or 400% on that Stock or whatever. Yeah, right, course they have - but they don’t tell you about the 9 Stocks they have lost 100% on. It all looks very appealing but in reality it is the Road to Hell. The Devil’s Work.
As an aside, why don’t people who implore other People to buy their cr*ppy Resources Stocks ever provide Full Transparency on their Trades? I don’t get this - and even more confusingly, why do People take any notice? It’s mystifying, but I suppose the beauty for me is that the kind of Nutters who frequent Resources Bulletin Boards (they are not all Nutters - but a huge % of the Population are) keep well away from me !! Another strange thing is that it must be blindingly obvious to even the most committed Resources Stock Bulls that it’s a terrible space to be Trading in at the moment - why don’t they just adapt their Style and buy Normal Stocks for a change? Maybe they just don’t like making money. It could be like a Charity thing - good on them.
Believe me, despite all I have said above and will say below in this Blog, if Resources become a good place to Trade in the Future, you can guarantee I will be playing a bit but this time with Stoplosses !!
So, in answer to the question at the start of this section, I honestly thought there was a chance that things could turn up and they could recover - I was totally naïve and stupid and I have paid the price in a bit way. In fact, the only thing I did right with these Mining Buys is that I put small amounts of my Portfolio into them - the most I had in any of them was 1% of my Total Portfolio Exposure - so it was no great pain in that sense (still p*sses me off though, as you can probably tell).
Why I decided to get the Hose out
The big deciding factor that made me take the Bold Decision to dump them was that it is obvious to me that Commodity Prices in general are at huge Risk of going much lower - I would say it is a 95% Probability. All this hype about a ‘Commodities Supercycle’ has turned out to be nonsense and the Prices are in meltdown. The obvious Red Flag with Resource Stocks is that they have no control over their End Prices to Consumers - this lack of ‘Pricing Power’ is a killer when the Prices are tumbling - a situation that is prevailing as of now.
Another thing people don’t realise is that the Prices the Small Miners can get in the Market are much lower than published ‘Spot’ Prices. For instance, if the Gold Price is quoted at $1100 for example, you will find that small Miners might only get $1000 per Troy Ounce - hugely misunderstood. This is often because they are a Forced Seller because they need Cash desperately for Cash Flow reasons.
The thing about Metals and other Commodities, including Food, is that we can read anecdotal evidence about Supply or Demand factors all day long but we can never get a true Fundamental Understanding of the Supply/Demand Balance - although there is a method which I will address in a moment. I constantly read things like “the Baker Hughes US Rig Index has gone down 5” or “Copper is in huge demand for Chinese Housing” or “major Miners are upping production despite falling Iron Ore prices”. It’s all very nice, but means nothing without the Full Picture - which of course we can never get even if we read everything ever published in a single week by anyone on the subject of Commodities.
The one doing the rounds at the moment is “The Oil Price is falling because Iran is going to produce more Oil after the Nuclear Deal” - this may well be true, but could the Oil Price really be falling due to fears of a China Slowdown? It could well be both - and probably a multitude of other Demand and Supply factors - it’s impossible to be definitive. We can never know the truth - no one can. Commodity markets are far to large and Complex for us ever to be able to reliably predict them with certainty. The Anecdotes that are bandied around by the ‘Talking Heads’ are just snippets of a massively complex Universe.
For instance, the ‘Substitution Effect’ is huge - for something like Corn Oil, if there is a bad harvest and prices go up, then there will be a switch to Soya Oil and so demand and prices will rise on that commodity. But how exactly these effects interact we can never tell - the complexities are not measurable or in any way predictable.
However, there is one way of telling which way Prices are most likely to head - and that is by looking at the Price Charts. The situation now on pretty much all Commodities (apart from maybe the odd Food one) is that they are in horrific Downtrends that show no signs of finding Support and Basing out. These kind of Downtrends have extremely Strong Momentum and I expect they will go a lot lower. If this happens, there is no way that any Small Miners or Small Oil Stocks can survive - we have already seen a Blood Bath with Companies like Afren AFR blowing up - I expect we will see much more.
With this prevailing background for Metals Prices, it was pretty obvious to me that these Miners were going nowhere apart from further Downside and at best they will have to do hugely dilutive Share Issues and more likely they will just go Bust. Probably the best of this pungent bunch is APF - however, with Metals Prices tanking their Royalty Model will not be immune and I expect them to cut their Dividends in time - although the Cash Pile may provide some cushion. But why put Money in such a situation? At best APF will go sideways - better to use the Cash in a Quality Proper Company that can have a Rising Share Price.
It was easier to make the Decision to clear out these cr*ppy stocks in the light of strong gains that my Portfolio has made this year. My Main Trading ISA is up 20% at the time of writing this Blog, so I am happy to use some of that ‘cushion’ to say “OK, I can take some Losses on the chin as I am doing so well” - it just makes the Decision psychologically a lot easier.
Scrape out your Portfolio Poo
Holding Duff Stocks in the Portfolio is negative in so many ways. Obviously as they go down they erode your Money and drag on the gains made elsewhere in the Portfolio, but in addition they are a Mental Drain because they take disproportionately more Brain Power and Emotional Capital - they are the ones you worry about and suffer great angst over. These Woofers are a distraction, it is better to Bite the Bullet and hose them out of the Horse Yard - they can be a bit sticky but my god I felt much better after finally seeing them go from my Portfolio.
Regular Sufferers of my Blogs and Tweets, will know that I am trying to get my Main Trading ISA down to 40 Quality Stocks - the ‘WD40’. It is crazy how tough I am finding this to do. I am now at about 44 so still need to get rid of 4. I want to get to a situation where each stock in the WD40 has to really justify and earn the Honour of being included in the Portfolio - there will be no place for substandard, High Risk, Junk. I want 40 Top Quality Stocks that will work in harmony to reduce Risk and to provide good steady Upside - in a way that I can ‘mirror’ safely and successfully using Spreadbet Leverage.
In a word - DISCIPLINE
Of course, the Poo that I have referred to here is very specifically about Resource Stocks, but the principle of not holding Duffers applies to other Stocks as well - if you are holding a Stock that you are not really happy with, or that you have doubts about, or maybe it has given several Profit Warnings and looks rudderless etc. then maybe you should take a deep breath, brace yourself and take the bold Decision to dump it. These Duff Stocks are sucking your Time, Brainpower and Emotional Resilience.
Even the best Investors in the world get things wrong - we will all make mistakes. The Key though is to minimise the number of these and avoid obvious, stupid, errors - cutting out the Junk Stocks like Small Resource Plays is a simple way to hugely improve Returns on our Portfolios. When we do make a mistake, it is vital to minimise its impact on the rest of the Portfolio and to get out early if we can - that is something I really need to fully take on board as a Lesson from this Mining Disaster (perhaps I am over dramatising it with my choice of words there…….)
And now for something completely different……
A strange finish to this Blog because I am going off at a bizarre, unrelated, tangent. I came across something in the BearBull Column in this Week’s Investors Chronicle (31 July - 6 August 2015, page 18) and I wanted to share it with everyone, but it was a bit too much for a Tweet. So, here it is:
“There is no secret information that Private Investors lack. Spend less time worrying about that and more time crunching the copious data that is available.”
I see the kind of thinking implied at the start of this quote all the time from Retail Investors - it is always the fault of Market Makers or Insiders etc. It’s nonsense, people need to stop making excuses and blaming externalities - the reason we screw up is our own Stupidity and Laziness - nothing more, nothing less.
Lesson over, wd.
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