Global Mining Investing $69.95, 2 Volume e-Book Set. Buy here.
Author, Andrew Sheldon

Global Mining Investing is a reference eBook to teach investors how to think and act as investors with a underlying theme of managing risk. The book touches on a huge amount of content which heavily relies on knowledge that can only be obtained through experience...The text was engaging, as I knew the valuable outcome was to be a better thinker and investor.

While some books (such as Coulson’s An Insider’s Guide to the Mining Sector) focus on one particular commodity this book (Global Mining Investing) attempts (and does well) to cover all types of mining and commodities.

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Thursday, June 06, 2013

Investing in uncertain times - diversification not necessarily good

Conventional wisdom is that investing is hard. The reason its hard is that:
1. Timing and term - its not just a question of buying at a good time, but buying at the optimum time so one is validated in uncertain times by subsequent market action.
2. Ignorance - None of us know the entire market. There is always going to be something we don't know. The good news is that we don't need to know everything, but we do need to know the substantial stuff, and we have the flexibility of being able to change our mind, usually before we lose our shirts.
3. Competitive - Markets are relative price mechanisms. The pricing of securities are relative to other things in terms of relative yields, and the objective veracity of our knowledge is assessed relative to the knowledge and money of other people. As questions are answered, money flows towards truth, and in the process tends to overcome even the richest and most obstinent buyers taking the wrong position.

It ought to be apparent in this context that those in the best position to make money from investing are those who know the most, whether in terms of the breadth of their knowledge, or the specialisation, depending on their value proposition, and also in terms of their liquidity. The importance of liquidity is that:
1. Small investors can take positions in stocks that the big players struggle to get a position
2. Small investors have ready access to companies that the majors struggle to get a foothold

Now fund managers can manipulate the market by using 'trading psychology' to accumulate large positions...but they have to be satisfied that they are not going to get caught be a change in market conditions. The implication is that:
1. The majors are able to use their market power to assemble a large stake - they are nevertheless vulnerable to sudden adverse news releases
2. The small investor is more readily able to secure a stake, but they are 'blown around' psychologically by any manipulation by the majors simply because there are few majors and minor stocks to invest in. Its not so much that there are a litany of great small stocks so much as many underloved small stocks which are always going to be appealing 'at a price'.

The paradox is that investors actually sabotage their prospects of making money by investing only in the major fund managers. This results in the under-valuation of small stocks, which tends to leave these companies vulnerable to takeover. This is not so much the problem. The problem is the willingness of shareholders to accept low prices for the assets if they get cash.

Much is made of people picking market trends. Journalists tend to 'romanticise' these people. This is certainly not valid 'selective' thinking. There are however cynics who simply conclude that no one can.
Alan Clarke: "Where is the person who can consistently make correct predictions? Certainly I have not met him or her, and I'm guessing you haven't either. Furthermore I doubt that you and I ever will".
There are actually a great number of people who are recognised for picking market trends or stocks. If anyone bothered to perform an analysis on my picks, they would probably see a positive, but its not all good, and most of the analysis is 'one-sided' in the sense that one is destined to recommend entries, but not recommend selling points. That is how recommendations go. That does not discredit the person. The reality is that markets are long-trending which makes it really easy to pick trends at certain times. It is harder to make money in a bear market, but then that is only so if you are going against the trend. One can trade short. What of an investor who actually anticipates what eventually occurs. Just a few months ago I picked the takeover of Union Resources by Marawid Mining Plc, making me 200%. This is not guess work; there was a lot of evidence to expect this.
I even ventured to pick RIM at one point because it looked undervalued. I didn't follow the stock beyond that recommendation, and it did recover, before falling further. This does not make me right or wrong, as much as inconclusive. Since I did not buy any, and did not follow the stock, its inconclusive to say whether I am wrong. You can't an advisor who recommended at $C85 would have held the stock until $C12. They do challenge their views - unlike a great many investors who want to be proven right.

At the moment, since the price of 18c I have been recommending GRY.ASX. Its recently reached 16.5c. A sure sign that I was wrong? Not at all, its evidence that I'm not a fortune-teller. My advice now is that they are an even better buy? They make more sense because the company is valued at its cash holdings only, and yet they have 4Mil oz of gold in the ground. I can't say that the project will not be seized by some militia in Burkina Faso, but then that's not the market's concern. The market is just negative about gold stocks. I look at gold prices and think, even if they fall to $1000/oz, there is tangible value there.

The roll of an investment advisor is not simply to generate 15-20% returns for you; its to understand the market to make as much as possible for you. Now, I can say that on numerous occasions I've made, or come close to making profits of thousands of percent. Of course if I was more actively researching, I could do better. The reality is that I don't have the time. The stocks I have such gains are Aquarius Platinum (3200% over 3 years on options), Minotaur Resources (missed out on 6000% gain over 3 months because of poor disclosure), and many others.

Now, when we have sceptics like Alan Clarke who really mislead the market. One factor need not malign your investment objectives. In fact investing is really a process of assembling a great many beneficial factors. If one or two don't come to bear, or if there is a delay etc, then you just make less money. The greatest risk posed to market investing results from:
1. Fraud in the market place
2. Poor disclosure
3. Government intervention

These are sources of risk which can be difficult to close, but there is 'gain' in those risks as well, assuming the 'ignorance' is evenly spread.
Alan Clarke:"Correct forecasting requires an ability to predict news before it happens (how silly is that?) It doesn't matter how smart an analyst might be, things can still happen out of left field that can wreck their careful analysis. This is why we should diversify widely - across stocks, asset classes, industries and countries. We need to lessen the impact of the unexpected".
That is precisely what it is, and people do it. The problem with Alan is that he seems to think that 'good forecasting' is a causeless phenomenon. The reality is that success takes work. A bad forecast is the result of inadequate work. For some that forecast might be the result of success, or not being invested in it. That's why you can't simply accept another person's forecast. You need to be in control of your money. It is silly to argue that 'diversification' will protect you. If there was a bird flu that killed 100 million people, a diversified investor would lose a lot of money. That's called systematic risk. If you invested 100% in a vaccine manufacturer, you might profit from other's misery. You might however expect a law that says vaccines must be offered free, so you might also invest in coffins. No guarantees, but there is reasons that 'diversification' ignores. These are called 'systematic risks'. The risks Alan doesn't know he doesn't know. His position is a position of mindless passivity. He doesn't encourage you to learn; in effect he implies its pointless to learn because you can't pick fortunes. Alan gets paid to advise people to diversify. The fact is that your mind is not a tool to mislead that. We do that when we don't respect facts.
When Alan implores you to diversify, he is locking you into a low-return strategy in the hope that the future will be like it was in the past. In a sense he is 'pragmatically' or implicitly accepting a 'world view' shaped by his previous life experience. In 10,000BC, his strategy would have been to invest in rocks, shells and sand. Obvious to their lack of value for centuries, until he gets lucky with the discovery of irrigation in 7,000 years later. Obvious to the fact that we arose from the cave because of the mind. This is no straw argument; this is the implication of the mindless rationalisation to diversify. Its the mindlessness that sees governments controlling our fate. Its the mindlessness that has a maid in the Philippines investing in the education of numerous people, hoping that they will take care of her when they are better able. She is oblivious to the risk that each of them might rationalise that it was not a loan, or that it would not be repaid if they never got a job. The first one can't repay because she got married. This is 'diversification' devoid of mental engagement.
Does this mean there is no place for diversification. No, it means where you have the opportunity, know your investments. If you have a 'sure thing', that is not enough, you need to know that your learning curve is very mature. Market experience can tell us that. So the problem is not diversification, its the mindlessness that accompanies it. After all, why sabotage returns by something you know is going to be a poor performer. You don't do that. You diversify against real risks, but you still attempt to find value, otherwise the huge opportunity cost you are paying is costing you money. Imagine the impact on your portfolio if you invested in bonds through the 2000s. Crazy! Was there reason to? No, only in the late 2000s did the risk of an equity market collapse arise. Reason for bonds? Why not just another great investment to position for the counter-market outcome. Why not Asian emerging market property? The problem is ultimately that people turn investing into a dogma that is destined to cause losses for people. I'd prefer to see people lose money in the process of learning, because they are at least getting an education. Mind-numbing diversification is the advice of a financial advisor who does not want an investor to question what they do with their money. How many investors have been ripped off by 'advisors'. I might also suggest that this ignores the most important issue - that you derive pride or a sense of efficacy and reward from investing. I don't know many people who get that from finding a financial planner.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
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Investment Strategy

If you are investing for the long term, you still need an investment strategy. Dont be fooled by the rhetoric of fund managers. The reason they advise you to 'buy & hold' is because they dont want to compete with you in sell-offs. Markets and industrial sectors are cyclical, so they demand trading to get the best returns. Fund managers actually cant hope to match the performance of small investors (if you are half good) because they have to manage huge amounts of funds and charge you a fee besides.
MY ADVICE is (i) look at a range of market indices and decide upon what level of correction would give you the justification you need to get in & out of the market. It might be a 5-10% retracement or a break of trend. (ii) Diversify if you dont have an intimate knowledge of the company or management. More than 30% in one company is aggressive.

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