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« A 20-Year Bear Market? | Main | Randgold Resources Limited Options Trade Up 60.87% »
Wednesday
Jul082009

Stocks: How Many Should You Own

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A friend of ours who is also an investor called us up to tell us that he had just purchased another dozen or so gold stocks and then proceeded to pepper us with questions about each one. Well we knew a little about some of them but what became apparent was that our friend also knew very little about his purchases which caused us some concern.

As the conversation developed our colleague revealed that he owns approximately 150 stocks which amazed us as we just cannot keep track of that many stocks. Our watch list is huge but its a giant leap from that list to actually putting our hard earned cash into a stock and even then we can still get it wrong. As the debate developed we defined three categories or strategies for investment as follows:

Strategy one is his approach of using a scatter gun and buying stocks with little knowledge of them in the hope that they will all be successful and some of them may turn out to be hugely successful by becoming ten baggers. A ten bagger is great dinner party topic where one can wax eloquently about the stroke of genius that brought about this success. However, it will also prompt the question of just how many of the stocks in your portfolio actually underperformed.

Strategy two is to be selective about what you purchase and try to learn everything there is to know about your stable of gold explorers and producers and keep a track of them. Watch for changes in management, the political situation in which they operate, any acquisitions that they make, changes to the incentives scheme for management etc.

Strategy three is to take the snipers approach to investment and dedicate yourself to just one stock. This stock you will learn to understand inside out, its history, how it reacts in any given situation, etc. You will still need to understand the precious metals market sector and the economic and political influences that affect your chosen star performer.

This latter strategy will be put down by many as having all your eggs in one basket and therefore carries with it an enormous downside risk but it does have a certain appeal for investors who do not have the time to spread their energies over a wide range of stocks.

We could also mix and match some of the above with the precious metals element of a portfolio being 40% spread over half a dozen companies, 40% in your star performer and 20% in cash for future opportunities.

So the question we have is what is your investment strategy and why does it work for you? Please drop us a line with a brief explanation of just how you play it as we are sure that our diverse readership are as keen as we are to think outside of the box now and again.


Have a sparkling day.

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For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector that is currently coming back to life, you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.

PS:

For those of you following our options trade on Randgold Resources Limited (GOLD) the PUT Contracts closed yesterday with a bid of $9.90 and a asking price of $10.20 which is a paper profit of 100% in less then a month. You could now sell half of your holdings in this trade and take your money off the table leaving the remaining 50% in place in the hope of greater profits should Randgold continue heading south. Alternatively you could sell this position completely and treat yourself to a bottle of bubbly. We have not made a decision as yet, however, taking profits now is a sensible move.

A big thank you to those of you who took the time to email us regarding this trade your responses are very much appreciated. We also apologies for not having the time to answer every email we get and thank you for your patience. We would suggest however that your questions and comments can always be placed on our site where it would get a lot of exposure to better brains than ours and attract alternative views to our own.





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Reader Comments (3)

Hi,

my stock selection strategy lies between 1 and 2 with the proviso that I do it biased towards stocks that are likely to do well as we enter an era defined by the end of cheap energy -aka: "The Post Peak Oil Era"...
An example would be a Molybdenum miner like Thompson Creek. I do not know large amounts about Thompson Creek -only that it is a major US Molybdenum producer and got severely beaten up last year. I do know that Molybdenum is used extensively in gas and oil pipelines and deep sea operations -much of which is rusting/needs replacement and is also used in the catalytic cracking of heavy oils that we will increasingly be relying on... So the macro picture of a likely non-discretional commodity with rising future usage gets a tick, the micro-economic entry point of an excessive fear-induced stock market panic sell-off for the stock also gets a big tick... Clearly a winner -so far I am up 250%+ this year, that's my dinner party story anyway... :o)

Others that 'fitted the bill':

1. Moly Mines: soon to be major Moly miner. Ditto TC reasons..
2. Rubicon: Saphire substrates for LED lighting -this is the future of lighting when energy bills go through the roof (£5000 bills anyone in the UK or are you going to do something about it???)
3. Lynas: Rare Earths -Neodynium for wind power, hybrids
4. +++plenty more but around 20 tops -enough so I can keep an eye on them but not day trading.

...anyway, Uranium is in there somewhere...

Nick.

July 9, 2009 | Unregistered Commenternoutram

I don't know if it qualifies as a strategy exactly, but it has elements that your three don't. Its biases is selection of a number of precious metal stocks from those recommended by sources I respect and consider reliable, including you. The key here is using review of research conducted by others that are more focused and experienced to make decisions.

I select stocks from the mid to upper tier of companies. Time does not allow following the juniors. And, although options are exciting and potentially more rewarding, my level of expertise is insufficient to trade them.

Now the next part of my strategy, if you classify it as one, is to play trends, long term trends and fluxuations within them. To use a baseball analogy, I try to consistently hit singles, some doubles and an occasional triple. I don’t “swing for the stands”. In practice this involves using basic technical analysis to time purchases and sales, take profits and cut looses.

Hope this adds something to the discussion.

Many thanks for your newsletter. Your research and analysis are both good and greatly appreciated. I read it religiously.

Richard

July 9, 2009 | Unregistered CommenterRichard Sywulka

I am writing in order to comment on the above article that was recently released. You asked what a person's investment strategy is. In my case, I am a believer in peak oil. I also believe that all fiat currencies fail and that afterwards, there is a reversion back to a hard currency.

In the case of peak oil, this event will happen only once in the whole history of our planet. So, getting that right and investing in energies could be very profitable if energy prices continue to rise, which it seems they eventually will do. In energy investing, I want to own energies: ones that we use now and which I think we will continue to use and which will become more and more expensive as supplies tend to dwindle down in future times. So, that means, I like crude oil, natural gas, coal and uranium. I also want to be invested in companies that are involved in alternative energies. This could be in the form of companies that construct energy efficient equipment, alternative energy suppliers or manufacturers of wind turbines etc. In energy investing, I also want to invest in transportation companies that I think will do well when or if energy prices rise very high again which I think they will. Transportation companies that I think will do well in this environment are rail companies and companies that do work within this somewhat smallish industry.

Then, I like to invest in gold, silver and presently even a little bit in industrial metals. In gold and silver stocks, I want to own some large miners, some middle, some juniors, some exploration companies and some drillers. I also want to own physical gold and silver and I want to keep some shares in the etfs.

Furthermore, if I think that something gets oversold, say natural gas, then I will want to focus capital in that area. Now seems like a good time to be investing in natural gas (commodity). So, now, I want to buy as much of that as I can because it is so cheap relatively speaking. There are other stocks or commodities that get bought when prices fall as well.

I am not the type of person who puts all of his eggs into one basket. I never was and I never will be. I have identified the areas that I think are important and I wish to safely diversify within those areas and when low prices come along I want to buy more then walk away and wait. When prices rise back again then I wish to sell and look for more sales. This is how I am a sniper yet how I use diversification to limit some of the downside risk. I am a believer in commodities, gold and silver and commodities stocks. I think that gold and silver are almost sacred substances. Their usage as real money is one of the primary means by which governments have ultimately been financially held accountable and by which inflation has been held in check. I wish that I could simply find one stock or several stocks and say that I felt safe putting my money only in one or several of them but I can't. I want broad diversification, but also, when the time is right, I want to put the petal to the metal and buy, buy, buy certain things when their prices hit super lows. It is a bit of a mixed bag approach. That's what I am comfortable with and that is how I like to invest. Thank you for listening to how I like to invest.

July 9, 2009 | Unregistered CommenterScott

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