Stock Market Wealth


by | Stock Market Wealth

Stock Market Wealth


by | Stock Market Wealth

*** On Sunday, in part 1 of RISK MANAGEMENT: OPERATING IN THE BEAR MARKET, which you can access HERE, I showed you how investors weigh their options in the investment universe, still shying away from gold stocks even though they are sensationally cheap because less risky alternatives still offer massive upside potential. This is yet another lengthy letter, and coupled with Sunday’s letter, they make up 2 parts of a 3-part series, which is our complete Bear Market Wealth Builder Manual. ***

Even though the overwhelming majority of investors hate gold right now, the bounce hasn’t happened yet.

Courtesy: U.S. Global Investors

But despite their hatred, it’s time to start looking at gold again. The bear market is not over, but the risk/reward ratio is becoming stunningly favorable.

No, I’m not building positions yet, but I do want to show you how I plan to invest when the initial signs that the bear market is ending, do appear.

In Sunday’s letter, I listed the 3 conditions that must be met for mining stocks to rocket higher like a frog leaping out of a swamp as they did in 2010-2011 and in 2016, but we aren’t seeing them yet.

What we can do, though, is perfect the Bear Market Master Plan.

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    I’ve summarized 11 ways to make sure that a bear market doesn’t make you feel like you’re stuck inside a laundry machine, headspun and nauseous anymore. Instead, you’ll notice that your trading is consciously controlled by you and possess a high level of awareness when it comes to your present environment. You’ll be in the driver’s seat, not handcuffed in the trunk.

    1. Monthly Contributions to the Portfolio: This is one of my favorite strategies for two reasons. When you invest in the resource sector in a bear market, you’re essentially betting that the money you’re “sinking” into your trades will, in due time, more than make up for the time it takes them to rebound. In the meantime, though, you’ll have to patiently dollar-cost-average, driving down the cost of purchases.

    Since these companies don’t offer a dividend, it is even more frustrating to see your hard-earned funds doing nothing.

    Some of the top mining multi-millionaires I’ve met over the years told me about stocks they’d already in thrown the towel on that came back and became big winners, but took 6-8 years for the positions to bear fruit.

    Holding for this long ONLY works if you commit to adding cash to your portfolio every month and investing in dividend-paying companies, because it will shrink the percentage of funds allocated to mining.

    It is easy to do and it is one of the ultimate diversifying strategies.

    I add $9 to my Dynasty Portfolio for every $1, which goes into the speculative Holy Trinity: Mining, Disruptive Tech/Blockchain, and Cannabis Legalization.

    When 90% of your portfolio is building a compounding powerhouse of Dividend Aristocrats companies, then the act of waiting for speculations to go parabolic, is sustainable in your psyche and you’re not making sudden mistakes.

    1. Dollar-Cost-Averaging: There is nothing more certain than that you will see your entry price into a stock is not the bottom. In other words, it is virtually guaranteed that another shareholder, down the road, will decide to sell his shares for less than you bought yours for.

    For this reason, you MUST decide in advance on the total amount you’re going to invest in a certain stock, and split your purchases over the course of several weeks or months, or do what I do, which is split it along percentage declines.

    What I do is decide on an amount (for example, $20,000), and initially take 20% of it to place my order. Next, I wait for the stock to decline 15%-20% and allocate an additional 20%, lowering my cost. If the stock goes down another 20%-25%, I allocate an additional 30% and repeat this again.

    The way it works is:

    1. $4,000 @ $1.00 per share.
    2. $4,000 @ $0.80 per share.
    3. $6,000 @ $0.64 per share.
    4. $6,000 @ $0.51 per share.

    Average cost: $0.705. So as the stock declined 49% overall ($1.00 to $0.51), my personal position is only down 28% ($0.705 to $0.51).

    It will only need to rally 40% back to $0.705 to reach my break-even point, instead of 100%.

    1. Active Investing: Of course, any stock that falls 50% isn’t to be dollar-cost-averaged into, blindly, without actively understanding what is happening with its sellers and why they are so eager to dump shares.

    In other words, with small-cap stocks, you must be following all public news releases and ideally speaking with the CEO or investor relations representative on a regular basis.

    What you want to make sure is that the investors who are doing the selling have personal reasons for their behavior, not business-related ones. You want to be as confident as possible that nothing material has happened with the company itself.

    This will also give you an indication of how much downside is left. Very often, these sorts of Q&A sessions with management end with a new conclusion on your part that the stock can easily fall another 50% so dollar-cost-averaging can be done for an even bigger discount.

    1. Shorting the Underlying Commodity: If you already know that the commodities sector is under the gun, short the commodity.

    This is a legitimate use of hedging. For example, if you’re investing into a tiny zinc miner while also shorting zinc prices, you’ll be earning on one hand while dollar-cost-averaging on the other hand. 

    Since the spot price for the physical mineral/metal is less volatile than the price action of the stock, this trade is a smart play when done right.

    1. Proper Position Sizing and Automated Stop Loss Protocols: In order to add even further control to the master plan, limit any investment to a maximum 5% loss of your overall net worth.

    Two factors determine this at the outset. You must use them. The first one is the amount you allocate to a given stock and the second is how much money you’re willing to lose before exiting the trade.

    In the example above, we invested a total of $20,000 in one stock, for a cost of $0.705 per share. What we should do now is determine the total net worth of this individual investor. Let’s assume it is $320,000. Our initial conclusion is that they cannot lose more than 5% of it, which comes out to ($320,000/20 = $16,000). The next stage is to calculate the price point at which this loss will be realized. That’s easy: $16,000/$20,000 = 80%, 0.705*0.20 = $0.14. For this investor to lose $16,000, or 5% of their overall portfolio in this example, the stock would have to drop to $0.14. If you followed this example, you know it has already fallen from $1.00 to $0.51, a 49% drop. But for this disciplined investor to lose 80% on this position and 5% overall, the stock would have to trade for $0.14, which is 73% from its current price of $0.51 and 84% since they first took an interest in it.

    One last thing to keep in mind is that if this actually happens and this investor sells for a $16,000 loss but still believes in the company’s potential in a bull market, they must be using our 6th strategy to leave the door open for gains. 

    On Thursday at 08:00AM CST, I will publish the final puzzle piece, part 3 in this series, and also have these three letters capsuled into a PDF file so you can archive it and keep referring to it at will.

    Best Regards,

    Lior Gantz

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