Junior Mining Stocks Are Not For The Faint Of Heart

July 20, 2012

Kiev, Ukraine

Bruce Lee, one of the most focused and driven human beings to have ever lived, passed away 39 years ago on this day. He went way before his time.

As a kid, I idolized the man. As a teenager I trained in his style. And as an adult, I studied his philosophy. He once wrote:

“A good martial artist does not become tense, but ready… ready for whatever may come.”

These words are quite prescient today; I’ll explain.

A lot of people go through what I call the “Aha moment”. It’s the point at which they realise not everything is what it seems… that the government is not their friend, that the system is stacked against them, that their paper money is a total fraud, that their bank is insolvent, etc.

These realisations can happen quite suddenly, often because of a catalyzing event.

Perhaps they had their bank account frozen by the tax authorities or watched their kids be frisked at an airport. Whatever it is, it can be a powerful event.

In many cases, this discovery of truth can lead to a great deal of anxiety.

When you find out that most of what you were brought up to believe is just smoke and mirrors, it can be an emotional experience.

Bruce Lee’s words are a good reminder that this anxiety… being ‘tense’… is actually destructive.  It can cause people to overreact and take irrational steps.

Being ‘ready’ on the other hand comes from measured action. In Lee’s case, it was mastery of his art through disciplined practice.

In the context of what’s happening in the world today, measured action means making a realistic, big picture analysis and creating a real plan to follow.

To give you an example, I spoke to one of our members recently who has a very clear idea of how he expects things to unfold in the coming years.

He has moved abroad, has precious metals secured overseas, is working on a thriving international business, and is currently seeking a second passport.

It’s all part of a plan to be ready for whatever may come, whether amazing opportunity or yet another bonehead move by a government gone wild.

With this idea of opportunity in mind, I want to address a question from a reader who asked:

“Simon, I subscribe to a lot of newsletters that recommend investing in small mineral exploration companies, what they call ‘junior mining stocks.’ I haven’t heard you mention much about this, can you give me your take?”

Not for the faint of heart, that’s for sure.

The big draw behind the juniors is that they can create ‘life changing wealth’. If some little company has a concession in Ghana, and, after years of exploration the geologists discover and validate a huge gold deposit, the stock can go from zero to hero practically overnight.

This can be truly life changing. Most of the time, though, it goes the other way.

The vast majority of these companies fail miserably. Many end up digging worthless holes in the ground. Or the government seizes their concession. Or they run out of cash. Or the officers and directors are a bunch of crooks. Etc.

There are definitely a lot of lowlifes in the industry– stock promoters who would sell their own mothers a worthless warrant, newsletter writers on the take, crooked regulatory officials, etc.

Certainly some people– Doug Casey and Rick Rule among them– have spent their careers in this industry and still ended up with a reputation for integrity and long-term success. But it’s not terribly common.

So like I said, not for the faint of heart.

There are some times when it’s an obvious opportunity, though.

In early 2009 during all the market swoons, Fortuna Silver had a profitable operation generating about $2MM / year in profit. The company also had $55MM in the bank. Yet the stock had been beaten so badly, its market cap was $45MM!

In other words, you could buy a profitable company for less than the cash it had in the bank… essentially a purchase price of NEGATIVE $10 million. Spectacular deal.

For the most part, though, the industry is too risky for me. I try to follow the two rules of investing– #1, don’t lose money. #2, don’t forget rule #1.

As such, I’m much more keen to invest in my partner Tim Staermose’s 4th Pillar trading system. Tim’s portfolio has never been in the red. Ever.

I’m also attracted to private deals; the potential financial rewards are just as explosive as resource exploration companies, but I can actually insert myself onto the board and/or influence the company’s operations. This makes the risk much lower in my book.

Have a great weekend.

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