How to avoid the sure path to losses and disappointment

Friday, 19 August 2022 — Burradoo, Australia

[7 min read]

Dear Reader,

What proportion of investors make a profit over long-term trading in the markets?

You’d think 50%, right? It’s a coin toss. Prices go up, down, and sideways.

Search online and the results such as here and here will tell you anything between 10% and 30%.

Diving into the markets without a plan or simply hoping to get rich quick will likely lead to deep losses and disappointment.

Why is that?

An ordinary investor likes to chase winners.

And who wouldn’t?

Something is rising quickly, and you don’t want to miss out!

Plus, the crowd can’t be wrong, right?

The problem is that many buy after the price has taken off or they let momentum confirm that this is the trade to make them rich. There isn’t a clear exit plan because they aren’t familiar with what they bought.

What if I tell you that despite these odds, it’s possible to increase your chance of being a winner?

While it’s not guaranteed, it’s a tried and tested way.

Let me share something with you…

Winning by minimising error

Most of you have heard about gold as an asset. It’s a boring asset. Many even call it a ‘barbarous relic’, ‘a pet rock’, and an asset that yields nothing.

Now, I’ve made a case that there’s merit in gold doing just that. Because it keeps track of the mistakes of the financial system, past, present, and future.

And I’m not the only one who says this. There’s the founder of The Agora, Bill Bonner, who likes gold because it’s a reliable asset that is just there. It doesn’t change.

He explains as much in my interview with him for ‘The Gold Investor Series 2022’.

This is one way to increase your chances of being a winner in the markets — avoiding making mistakes!

Or you could take additional risks, but a calculated one.

This one isn’t for everybody, though.

And if you want a quick profit and little effort, I ask you to stop reading right here.

The veteran’s winning strategy

Many investors dive into mining stocks with the hope of making a massive return. And they go for the tiny companies as well — the penny stocks. The smaller, the better.

Others do a random sweep of 10 or 20 names hoping to see two or three take off like a rocket — the Pareto analysis of the 80/20 rule.

But this is like going to the roulette table and putting your chips across several numbers, hoping it pays off.

I don’t doubt that some of you have enjoyed success doing it this way. It has its merits.

The mining investment legends that I follow have a better way.

Take Peter Schiff and Don Durrett, for example.

Both have decades of experience in investing in gold mining companies. Their successes are largely in the producers. That’s the bread and butter of most mining investment veterans.

And that’s why I wanted them to also be a part of ‘The Gold Investor Series’, to give those who are interested an opportunity to hear a first-hand account of a tried-and-true gold investing strategy.

Producers have confirmed deposits, established plants, and are generating revenue. These companies have worked hard to either find a deposit or raise funds to build or purchase one. A well-run producer will generate a profit during lean times and significant gains in good times. This allows them to grow bigger through expansion or exploration.

I started my foray into investing in gold through buying shares in gold producers too. It was in mid-2013 when the gold bear market turned savage, lasting until the end of 2014. The journey was rough, and I could’ve given up on many occasions.

Listening to the veterans helped me stay the course and it paid off.

When people threw in the towel, I bought more and increased my holdings across several gold producers. Some of them were solid companies but the squeeze of a high price of crude oil relative to gold meant many were marginally profitable. Therefore, the shares of these producers were trading at multiyear lows.

What was an insane strategy turned out to be paying cents to buy dollars. It didn’t feel like it at the time.

In hindsight, I’m glad I had the advice of those who experienced this before to keep me on the path. You can see below what happened to my portfolio in the first 18 months:

Of course, I’m writing to you now because things turned out well after all:

An opportunity presenting itself now

Gold is a cyclical asset. It waxes and wanes depending on how investors are willing to fall for the story that the central bankers and governments will keep a stable economic system.

The public is like a naïve love fool believing the philanderer one more time after getting caught with their pants down.

And that’s why holding gold is a good idea. It’s like at least if the cheat walks out on you, the ring is yours.

Gold stocks, on the other hand, could prove to be an even better play on the failure of the financial system.

This time around, with two years of gold trying to break out of a narrow range, it might propel gold stocks to deliver exceptional gains.

The recent sell-off in gold stocks seems to have taken the wind out of even the most faithful investors. This is especially the case with the speculative explorers and developers.

Don Durrett believes that the success rates with investing in explorers and developers is around 10% and 20%, respectively. But the rewards can be exceptional.

Some of these stocks have started to attract the attention of speculators in recent weeks. Several of these companies have topped up their cash balance to ensure they can weather any storms ahead.

You don’t want to miss out on the opportunity to grab these companies. Who knows what returns they can deliver to you…

In fact, I have one such company in mind that I’m recommending to those who attend today’s keynote event of ‘The Gold Investor Series 2022’.

You’ll get all the details, including the ticker symbol and buy-up-to price, simply by watching here.

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia

Dear Reader,

‘As for financial crises…well, haha, it would perhaps be presumptuous to say that a financial crisis will never occur again, but with our current knowledge and tools for prudential monetary policy, certainly we can say that a financial crisis will not occur in our lifetimes.’

Former Fed chief, now Secretary
of the Treasury, Janet Yellen

Janet Yellen was still alive in the first half of 2022. And there it was. Only months after saying such a dumb thing…came the proof of how idiotic it was.

The first six months of the year were almost unbelievably bad. Stocks and bonds went down. Cryptos vanished. A traditional, balanced portfolio — 60% stocks, 40% bonds — had never had such a bad time of it. And a recession began.

Ms Yellen had no idea what was happening. But we wanted to know. So we put two simple questions to our most experienced and most thoughtful analysts:

‘What do you think is going on?’

‘What are you doing with your personal money?’

Unsurprisingly, the answers were as varied as the experts themselves. Some said, ‘hold em’. Some said ‘fold ‘em’. Some said, ‘walk away’. And some said ‘run’.

A few readers asked for our answers. At the risk of repeating much of what we discuss every day, herewith, we give them:

What do we think is going on?

We believe we are in the early stages of an about face in the Primary trend. From bull to bear…low inflation to high inflation…from low interest rates to high ones…from order to disorder…and from bad to worse.

Since the new money was introduced in 1971, US markets have been more responsive to the Fed’s liquidity than to real changes in the economy. GDP has risen about 20 times since then. But the stock market rose twice as much. The more ‘liquidity’ (money printing and ultra-low interest rates) coming from the Fed, the faster stocks and bonds went up. Marty Zweig, an early investment newsletter guru who lived in the most expensive apartment in the US, on the top of The Pierre on 5th Avenue in New York, understood what was going on long before we did. ‘Don’t fight the Fed’, was his sage advice.

Had you followed it, you could’ve simply bought the Dow and rode it up from 900 in 1982 to 36,000 in 2021. The Fed was paying the band. Everybody was dancing.

The climax of this hoedown came in 2020–21, when the Fed turned up the volume, with an additional US$4 trillion in brand-new money…used to finance the federal government’s stimmies, PPP loans, and unemployment boosters. The combined effect of COVID shutdowns, supply chain disruptions, money printing, and deficits was to push bonds to their peak in the summer of 2020 and stocks to their tippy top at the end of the following year.

Then, with consumer prices butting up against double digits…the Fed was forced to change course. That is the big difference between this and every other downturn since 1982. Now, if you don’t want to fight the Fed, you’ve got to turn around. Because the Fed is draining liquidity out of the market. It is deflating, not inflating. Very slowly. Hesitantly. But so far, steadily.

Until 2020, bonds had been going up for 40 years as the Fed consistently cut interest rates. Now, the Fed is raising interest rates. Stocks and bonds are going down. And if this is the Primary trend we think it is it will continue for many years.

So what to do now? More precisely, what are we doing?

First, we don’t have unlimited confidence in our own guesswork, so we keep about a third of our family wealth in Chris Mayer’s Woodlock House Capital Fund. Chris is smarter than we are. He buys quality stocks and sticks with them. Good companies produce real wealth. Over the long, long run, owning them will pay off.

Second, we have another third in cash, gold, and energy. In the short run…which could be 10–20 years…there are problems to be reckoned with. How it will all shake out, we don’t know. So we keep some physical gold, some gold stocks, and some coins. We don’t regard gold as an ‘investment’. It’s simply a way to hold wealth for future generations. Perhaps, someday, gold will be upstaged by some form of cryptocurrency. In the meantime, we’ll stick with the yellow metal.

Energy, on the other hand, is an investment. We expect fossil fuel providers to do well as governments try to put them out of business.

Third, we have the rest of our money in quirky investments that we’re almost too embarrassed to mention. Property, for example. Business start-ups. A marble company in Latin America. A book publisher in England. A little of this…a little of that.

In one portfolio, we choose the worst performing stock markets in the world…and buy them. We know nothing about them. We are simply relying on ‘regression to the mean’ to bring them back to normal.

Has it worked? Yes…and no. Russia, for example, was one of the worst stock markets in 2021. So we bought it for 2022. Disaster! There are always surprises…most of them, unwelcome.

We are also buying farmland in South America. This is a fluky situation, too, more of an adventure than a real investment.

Cropland varies greatly in price and productivity. In this (relatively poor) region of France, it goes for about US$5,000 an acre. In Midwest US, it’s more like US$10,000 an acre. In Ireland, it can go for US$20,000 an acre. But in Bolivia, a large tract of cultivable land will sell for US$1,200/acre. Given likely assumptions about crop prices, fuel, fertiliser, labour, etc., we can project a 10% return on investment.

The odds of an ignorant foreigner, like us, actually making this work are very slim. And we certainly wouldn’t advise anyone else to try it. But we’ve been raising cattle in Argentina (at a loss!) for more than 15 years…and every year we learn a little more…and every year we think we’ve finally got it figured out.

So we’re not going to stop now! Not when we are getting so close.

Regards,

Bill Bonner,
For The Daily Reckoning Australia