Secret #1: Contrarianism takes courage.
Everyone knows the
essential investment formula: “Buy low, sell high,” but it is so much easier
said than done, it might as well be a secret formula.
The way to really
make it work is to invest in an asset or commodity that people want and need but
that for reasons of market cyclicality or other temporary factors, no one else
is buying. When the vast majority thinks something necessary is a bad
investment, you want to be a buyer—that’s what it means to be a
contrarian.
Obviously, if this were easy, everyone would do it, and there
would be no such thing as a contrarian opportunity. But it is very hard for most
people to think independently enough to risk hard-won cash in ways others think
is mistaken or too dangerous. Hence, fortune favors the
bold.
Secret #2: Success takes discipline.
It’s not
just a matter of courage, of course; you can bravely follow a path right off a
cliff if you’re not careful. So you have to have a game plan for risk
mitigation. You have to expect market volatility and turn it to your advantage.
And you’ll need an exit strategy.
The ways a successful speculator needs
discipline are endless, but the most critical of all is to employ smart buying
and selling tactics, so you don’t get goaded into paying too much or spooked
into selling for too little.
Secret #3: Analysis over
emotion.
This may seem like an obvious corollary to the above,
but it’s a point well worth stressing on its own. To be a successful speculator
does not require being an emotionless robot, but it does require abiding by
reason at times when either fear or euphoria tempt us to veer from our game
plans.
When a substantial investment in a speculative pick tanks—for no
company-specific reason—the sense of gut-wrenching fear is very real. Panic
often causes investors to sell at the very time they should be backing up the
truck for more.
Similarly, when a stock is on a tear and friends are
congratulating you on what a genius you are, the temptation to remain fully
exposed—or even take on more risk in a play that is no longer undervalued—can be
irresistible. But to ignore the numbers because of how you feel is extremely
risky and leads to realizing unnecessary losses and letting terrific gains slip
through your fingers.
Secret #4: Trust your
gut.
Trusting a gut feeling sounds contradictory to the above,
but it’s really not. The point is not to put feelings over logic, but to listen
to what your feelings tell you—particularly about company people you meet and
their words in press releases.
“People” is the first of Doug Casey’s
famous Eight Ps of Resource Stock
Evaluation, and if a CEO comes across like a used-car salesman, that is
telling you something. If a press release omits critical numbers or seems to be
gilding the lily, that, too, tells you something.
The more experience you
accumulate in whatever sector you focus on, the more acute your intuitive
“radar” becomes: listen to it. There’s nothing more frustrating than to take a
chance on a story that looked good on paper but that your gut was warning you
about, and then the investment disappoints. Kicking yourself is bad for your
knees.
Secret #5: Assume Bulshytt.
As a speculator,
investor, or really anyone who buys anything, you have to assume that everyone
in business has an angle. Their interests may coincide with your own, but you
can’t assume that.
It’s vital to keep in mind whom you are speaking with
and what their interest might be. This applies to even the most honest people in
mining, which is such a difficult business, no mine would ever get built if
company CEOs put out a press release every time they ran into a
problem.
A mine, from exploration to production to reclamation, is a
nonstop flow of problems that need solving. But your brokers want to make
commissions, your conference organizers want excitement, your bullion dealers
want volume, etc. And, yes, your newsletter writers want to eat as well; ask
yourself who pays them and whether their interests are aligned with yours or the
companies they cover.
(Bulshytt is not a typo, but a reference to Neal
Stephenson's brilliant novel, Anathem, which defines the
term, briefly, as words, phrases, or even
entire books or speeches that are misleading or empty of
meaning.)
Secret #6: The trend is your
friend.
No one can predict the future, but anyone who applies
him- or herself diligently enough can identify trends in the world that will
have predictable consequences and outcomes.
If you identify a trend that
is real—or that at least has an overwhelming amount of evidence in its favor—it
can serve as both compass and chart, keeping you on course regardless of market
chaos, irrational investors, and the ever-present flood of
bulshytt.
Knowing that you are betting on a trend that makes great sense
and is backed by hard data also helps maintain your courage. Remember; prices
may fluctuate, but price and value are not the same thing. If you are right
about the trend, it will be your friend. Also, remember that it’s easier to be
right about the direction of a trend than its timing.
Secret #7:
Only speculate with money you can afford to lose.
This is a
logical corollary to the above. If you bet the farm or gamble away your
children’s college tuition on risky speculations—and only relatively risky
investments have the potential to generate the extraordinary returns that
justify speculating in the first place—it will be almost impossible to maintain
your cool and discipline when you need it.
It’s
better to risk 10% of your capital shooting for 100% gains than to risk 100% of
your capital shooting for 10% gains.
Secret #8: Stack the odds in
your favor.
Given the risks inherent in speculating for
extraordinary gains, you have to stack the odds in your favor. If you can’t,
don’t play.
There are several ways to do this, including betting on
People with proven track records, buying when market corrections put companies
on sale way below any objective valuation, and participating in private
placements. The most critical may be to either conduct the due diligence most
investors are too busy to be bothered with, or find someone you can trust to do
it for you.
Secret #9: You can’t kiss all the
girls.
This is one of Doug’s favorite sayings, and though
seemingly obvious, it’s one of the main pitfalls for unwary
speculators.
When you encounter a fantastic story or a stock going
vertical and it feels like it’s getting away from you, it can be very, very
difficult to do all the things I mention above. I can tell you from firsthand
experience, it’s agonizing to identify a good bet, arrive too late, and see the
ship sail off to great fortune—without you.
But if you let that push you
into paying too much for your speculative picks, you can wipe out your own
gains, even if you’re betting on the right trends.
You can’t kiss all the
girls, and it only leads to trouble if you try. Fortunately, the universe of
possible speculations is so vast, it simply doesn’t matter if someone else beats
you to any particular one; there will always be another to ask for the next
dance. Bide your time, and make your move only when all of the above is on your
side.
