I took a lot of flak after yesterday's article as readers quite justifiably questioned my timing when it comes to the mining and metals stocks. Of course, if you are relying on me for timing, then you have not been paying attention over the years. I am not too bad at identifying cheap assets, but I am the world's worst timer of markets and sectors. In fact, I suspect that the most successful trading strategy in the history of the world might be to sell out on stocks I suggest are cheap. The vast majority of my picks go down before reversing course over time.
I feel bad when my picks do not work out, so I went back and reviewed my history with the miners and metals. I was surprised to find that while the sector is not doing great, it is not horrible either. I have a decent loss in Coeur Mining (CDE) of about 25% over the past few years, but I have a profit in Pan American Silver (PAAS) and am basically breakeven in my position in Hecla Mining (HL). My worst miner is one I suggested adding to yesterday, as my once impressive gains in Buenaventura (BVN) evaporated in the final quarter of 2014. All the metals stocks I bought have done much better than my energy-related stocks, and I feel a lot better about their recovery potential than I do stocks like Swift Energy (SFY) and Hercules Offshore (HERO). In these energy stocks, the situation has changed drastically, and the margin of safety vanished quicker than I could have ever imagined.
I also noted that my combined position in all things precious metals never reached 5% of my portfolio in total. That is what I mean by stay small and move slow. No matter how much I love a story or idea, I very rarely buy more than a 1% initial position in a stock, and I add in small increments when a stock declines further. I like to own a lot of small positions in cheap stocks and I saw no reason to treat the miners any differently. If anything I am skittish about the actual value of precious metals so I moved slower than usual with resource stocks.
So far, I have gotten the miners and resource stocks wrong. Over the course of 2014 resource prices changed quicker than I thought they could and many of them have dropped. As we moved towards the end of the year, I totally reconsidered and changed the way I measure the margin of safety, and my stress test approach for resource-related stocks. That should help going forward, but for now, I am just dead wrong on the metals miners. Of course, I am also wrong on my energy stocks.
Please do not take this as a mea culpa or apology of any sort. Peter Cundill once remarked that if you are right about half of the time in picking stocks, you should do well over time. If you are correct six out of 10 times, you will do extraordinarily well. Buying stocks that pass the filter of safe and cheap have done better than that over the years, and my batting average of winners to losers is pretty high. I will never get them all correct, but I will get a lot them correct. My point is to make sure that if you are going to use my stock picks (and I hope you do, because the deep value approach works very well over time), I want to make sure we are on the same page.
First, be aware that I am a terrible timer. Most of my picks go down before they go up. Sometimes, they go down a lot before they go up. Two fantastic examples of that are Atlas Pipeline (APL) and Conn's (CONN), both of which dropped more than 50% before moving higher. Both were eventually sold for more than double what I paid for them.
Second, my time frame is "until it works." I really do not care how long it takes for a stock price to reflect the full value of the assets. As long as I think the value exists, I will hold the stock. In the case of the miners, I have only owned them for about two years, so we are just getting started. I own stocks for a long time, and I really do not care about the day-to-day price movements of my holdings. I only care about the value of the company relative to the stock price.
I buy cheap and sell dear, and ignore what happens in between those two events. This approach gets a lot more right over time than it gets wrong.
