Thanks to all who sent feedback on my thoughts around Stop Losses and, more generally, when to sell.
I did more thinking, lots of it sparked by reader emails. As a way of running through all those thoughts, I’ve included quotes from various emails below and followed up with my thoughts. Scroll past the quote-response section to the end of the article if you just want to see the conclusion.
Stop losses are for people investing in extremely liquid equities.
Stop losses are for people who do not re-evaluate each position immediately after every news release, and every company presentation, and every macroeconomic development of note.
Stop losses are for people who do not frequently re-evaluate their thesis for buying a given company.
In other words, stop losses are NOT for people who invest in the junior resource space. People prone to using stop losses may have accidentally wandered into the resource space, but they do not belong here.
I included these comments as an example of the many responses I got opposed to Stop Losses. Such responses included points like the above: the fact that many juniors’ limited trading volumes means selling and re-entering isn’t always an option (depends on the size of one’s position, of course) and the worry that volatility will often stop one out of a position when the thesis in fact remains strong.
I agree that frequently re-visiting one’s investment thesis is the answer. In reality, though, that is hard because:
- Portfolios of exploration stocks are necessarily large – your odds of hitting a big win increase the more (good) bets you place. That means keeping up with a lot of stocks. My primary approach for that is to assess each stock when it puts out news…but sometimes there are large gaps between news releases and the stock can slide in that time.
- This all happens in the context of the market. If a stock was a good buy at $0.18 but then the entire precious metals market slid for half a year, perhaps it slides to $0.12. If the market then turns up, like it has of late, should one buy more of that tiny prediscovery explorer because it’s cheaper? Yes, if your primary goal is to average down that cost base…but no if your goal is to position your portfolio with what makes sense in the moment. In this moment, I think more advanced gold stocks make more sense and so I am putting money into those. I probably still like the pre-discovery explorer and wish I owned it at $0.12 instead of $0.18…but buying more to average down that position is not the smartest way to allocate capital right now.
- The overall answer is to do better at keeping tabs on every stock in the portfolio, which means revisiting the value proposition more frequently than just when news happens. The irony in that idea is that a structure similar to a Stop Loss is probably the best idea! What I mean is to instruct one’s portfolio software to flag any stock that is down 30% (or 20% or whatever number works for you) as a push to revisit that stock in the new context: its value proposition, its timeline/momentum, and its appeal versus other stocks at that moment.
It’s risk tolerance. I agree that sometimes we hold stocks too long. It’s human nature to carry on, but I think it should be an information catalyst to change my investment thesis. The one thing I will give GR is that a stop loss might prevent us becoming frogs that didn’t notice the water was coming to a boil.
I thought this comment was a great capture of some of the realities of these decisions. Yes, we all hold some stocks too long. I certainly do. Yes, selling should stem from information that changes the investment thesis, but sometimes the ‘new information’ has to be valuation and 5 upside within the market rather than a piece of new news. For instance, if an explorer bought at $12M market cap slides to $8M without releasing significant news, it might be time to hold or to sell. I’d say it depends on the details of the story (drill results pending, just taking a long time? Or weather prevented drilling the target? Free trade date sparked selling in a weak market? Or did you buy when anticipation was hot and in the wait for results it’s evened out?). It comes down to: is news coming or has the story been stopped in its tracks and, if it’s coming and is good, what is the upside from here? And how does that all compare with the likelihood and scale of upside from other kinds of gold stocks – are mid-tier miners a better bet at the moment?
I like the analogy of frogs not noticing the water is heating up (though cooling down to frozen, an equally deadly outcome for frogs, is a better setup here). When we like a story – like the geology, the targets and the science, the people – it’s easy to stay with a stock even as the story gets colder. That’s the human nature part: we don’t want to sell because the story shouldn’t get colder. It’s too good! It deserves to make progress! But one of the frustrating things about exploration is the number of stumbling blocks. Personnel issues, weather challenges, drill rig availability, wildfires or smoke or floods, seasonality, wildlife, permitting problems, and more can all get in the way of exploration, while regulators, technical reports, legal issues, and more can slow corporate dealings more than you might think possible.
As I noted in the last bullet point above, a flag to re-assess stocks that fall X% from your entry point is probably the right approach. I think a required re-assessment of every stock that gets to this point should help – re-evaluating for a specific, clear reason (% loss) is a good, objective starting point, and doing so repeatedly should make us better at recognizing our particular weaknesses.
It would be useful if you kept the ones that still had potent as on a watchlist, maybe just a single line on the bottom of the table with the names. Maybe review the names every 6 months and drop them if necessary. Useful to know who could come back and which are no-go areas.
I think this makes sense. Any stock that I sell because it has slid notably (30%?) for reasons not related to project potential (such as exploration delays or weak mining markets) should remain on a list within the letter. That list would end up being projects with promise that I entered too early and should re-assess once action is truly at hand. A quarterly review to assess whether things are about to happen with each stock on the list could be pretty useful.
On Stop losses, I think a public stop loss figure is dangerous as no doubt some trader may try and trigger them.
This is a point I hadn’t thought of but that’s undoubtedly true. At the recent Metals Investor Forum, I had several conversations with companies about social media happenings that sparked insane trading (look at Oct 29th for Forum Energy Metals – that volume spike and price dive was all because of a well-followed tweet). Social media can really move stock prices these days, especially for thinly-traded junior explorers, and there are undeniably people out there who try to create such moments for their own gains.
All that to say: I agree. A public Stop Loss number could feed into this kind of scenario, which would be detrimental to investors and companies.
What I have always thought would be useful is an annual dummy portfolio. Start with say $200,000 at beginning of 2022, allocate as you see fit from the names you cover, just the ones you think are the best to hold at the time, maybe keeping some dry powder but not too much. And then do it as a portfolio where there is no more cash added, so you have to find cash for new purchases. I think it would be useful in showing us how to construct a reasonable portfolio and help us understand the risk management we should be using, where we should be trimming and adding based on your current thoughts.
This is a good idea: maintaining a portfolio each year that requires selling something to buy the next thing. Most of us have to sell in order to buy, so it incorporates that reality. And while it’s a bit arbitrary to do it on the calendar year, it also makes sense:
- December is usually a great time to buy, so it would have the portfolio start out at an appropriate point
- A year is long enough to capture the realities of portfolio risk management while being short enough that new subscribers can see a start point that is reasonably recent
I think running a ‘real’ portfolio should offer lessons in risk management and capital allocation. It would also reflect current/recent foci, both in terms of specific stocks and areas I like at the moment (explorers versus miners, gold versus copper versus uranium). And I think it should certainly convey these concepts more clearly and informatively than simply seeing what I like best as Buys Today (as per bolding in the Portfolio Table).
The only challenge, my friends, is time! Here I mean my time to manage this aspect of the portfolio and convey those actions in the letter alongside everything else. But I really like the lessons and conversations that I think will flow from this. So I am going to give this a try. The new $200,000 portfolio will debut in December…
As you might have gathered, I think the best approach to manage losses when stocks slide is a required re-assessment any time a stock falls 30% from my entry point. This should encourage me to recognize when stocks are not happening on the expected schedule or when changing
market conditions have weakened the potential, and to do so earlier (and thus with smaller losses) than I have been to date.
Those that I decide to sell I will keep on a watch list below the Portfolio Table, as suggested by the reader above, and will revisit those ideas quarterly.
Note: I will start on this next week, re-assessing the rationale for stocks that are down 30% or more. Getting through this thought process and letter didn’t leave time to also apply the new concept!
And as described above I will endeavour to run an annual $200,000 investment portfolio. The idea will be to allocate most of the money right out the gate so that I have to sell something to fund further buys. This will, I think, provide better insight into capital allocation and portfolio risk management.