Monthly Archives: January 2014

Miner ETFs VS individual stocks

Depending on where you look on the web, you’ll find a different average cost for miners to pull gold out of the ground.  Whichever amount you choose to believe, you can fairly estimate that gold is currently selling at or below the cost to mine it.  Thus, the miners are not likely to be profiting.  Hence, their stock prices are currently trading at a significant discount (see my article on Why stock prices for mining companies can go so low).

I like the miners because when the price of their respective commodity drops significantly, they can scale back operations and go into more of a survival mode, by cutting production and lowering expenses until the commodity price starts to re-elevate. Once the commodity hits a price that becomes more profitable, they can kick things back into high gear while having learned a few lessons in efficiency due to the downturn.  Their biggest objective during the downturn is make their debt payments.

And that’s why I like holding ETFs over individual gold stocks.  Since I don’t have the time to investigate each of the miners and learn how each manages its debt (as well as many other business factors), I know that by buying an ETF, I’m buying the average.  Some companies will do well, and some will not do so great.

In fact, some companies will do so poorly with their debt that they may go out of business.  Since the actual mine is the collateral of the loans, what is likely to happen should a miner go out of business?

Well, the debtor would come in and foreclose on the property.  But the debtors can’t do anything with those mines as they are in the lending business, not the mining business, so they would just turn around and sell the mine to another mining company (or more realistically, one of the better managed miners will first step in and buyout the company/debt for a discount).

Thus, if you are in an ETF that holds many mining companies, you are likely to get that mine back through another company in the ETF.  So it sort of all comes out in the wash, which is another reason why I like holding an ETF over an individual stock at this point in my life (see about me page).  For every company that significantly under performs, another company is likely to significantly outperform.  You do give up the chance for even greater gains but you gain security of knowing you didn’t pick a catastrophic company (see my article about knowing your risk tolerance.)

I have developed a proprietary investment technique for stable investing which I’ve developed over my many years of successful investing while going through major life changes. Having the knowledge above alone is not enough. You need to implement a stable, intelligent investing technique to get substantial, stable gains while protecting yourself from losing money.  I intend to release my technique in a membership section in the future. Please Join my mailing list to be notified when it will be available.

 

Should you invest in Bitcoin?

Bitcoin is a new digital currency that is gaining quite a bit of notoriety lately, especially since the Winkelvoss Twins (of Facebook fame) started promoting their involvement in the cryptocurrency by reportedly owning a significant amount of the virtual coins and also trying to bring to the stock market, a way for investors to easily purchase shares of Bitcoin value in an ETF.

I started researching bitcoin to learn more about what it is and how it works and it didn’t take long before I realized its not likely to be a long term, stable investment that I would put my money in for one big reason.

No… my reason is not that Bitcoin is not backed by something of physical value, like gold, as many other articles have pointed out.

If you read the original white paper that introduces the Bitcoin peer-to-peer financial network concept, you’ll continually see references that make statements like, “The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”

In my opinion, once there’s enough value to be stolen, there’s nothing stopping a well funded terrorist type group from attacking the integrity of the system by taking control of the system by overpowering the “honest nodes” with “dis-honest nodes”.

Also, I don’t like that the inventor of the protocol is a pseudonymous developer (named Satoshi Nakamoto).  It doesn’t sit well with me that the inventor(s) have chosen anonymity.  They seem to be pretty clever to have created such a brilliant scheme, but how do we know that their brilliance doesn’t go beyond what they are showing.  Maybe they have a secret, undisclosed, hard to discover, technique within the protocol to make a small amount of CPU power act like a lot of CPU power, such that they can easily take control and overpower all the “honest CPU” power on the network.  As the inventors are anonymous, they could easily watch the value of their invention skyrocket and cash out into real money before crashing the system and anonymously walk away with a huge amount of value.

Also, with something so new and untested, some form of a loophole will likely someday be discovered that allows someone to control the network in a negative way.  I haven’t delved into the encryption strength that Bitcoin uses within the system, but I do know that as computing power continually grows, we continually need better and better encryption technology.  There was a time, in the early internet days when 40-bit or 56-bit encryption was considered safe enough for financial transactions (https connections).  Now advanced 128-bit is considered the minimum.  So if the encryption strength is not easily modifiable over time, there is a likelihood that years down the road, someone will be more likely to be able to hack your Bitcoin encryption keys.

With all that said, I will not avoid using Bitcoin.  I hope it becomes as ubiquitous as PayPal.  I like the idea of it.  I own a couple small online storefronts and may soon start taking bitcoins as payment.

However, based on the potential network takeover possibility, I don’t plan to invest or store any significant amount money in the system as an investment.

As a final note, I’m not predicting that the value of Bitcoins won’t exponentially increase.  In fact, based on the growing hype, and especially if ETFs get created where big money can easily flow into and cause massive inflation within the Bitcoin system, a short term investor could make some decent gains, especially if one was to get in before the ETFs start showing up (it may be too late already).  However, I am a married man with a family who invests for the long term, and based on the discussion above, Bitcoin investing is too risky for me to have significant involvement.

 

 

Have the Gold Miners hit bottom?

Gold is up about 3% over the last couple weeks and that increase has translated to even larger gains in the gold miners.

2014-01-03-Gold-Increase

2014-01-03-GDX-Increase

2014-01-03-GDXJ-Increase

Backing up what I wrote in a previous article, “Is it better to invest in Gold or Gold Miners?“, after a large decline, you can see that a small gain in gold translates to much larger gains in the miners, with nearly an 8% increase in the large cap miners and 14% increase in the junior miners.

So have we hit the bottom and will gold and the gold miners take off exponentially from here?

I have no idea.  My technique is not to try and predict the market but to invest wisely with a proprietary long term, stable, technique.  I know that the sector has gotten beat down immensely, so, due to shorting and other factors, I know there is likely a higher probability that it is undervalued than it is overvalued.

If you haven’t started investing in the miners, now is a good time to get involved in the gold miners.  By “get involved”, I mean you should buy a small amount, maybe around 5% of your portfolio, not throw a large amount of your investment portfolio at it.

My proprietary technique of investing involves only purchasing into a sector as it is out of favor and on its way down, which is when it is most likely to be undervalued in the long term. So if the market shoots up from here, you’ll get a nice gain from your initial involvement. Don’t chase after the gains by adding more as the price goes up.  Hold on to the rest of your portfolio as there will be plenty of other opportunities in other sectors as the volatile market money flows shift over time.  Don’t be in a hurry to get all your portfolio into the market.  Keep lots of cash ready for “the next big thing”; there will be plenty of them.

If the miners settle back down and continue their decline, with my technique, you’d continue to make purchases at “minor” and “major” levels from YOUR initial purchase.  This way, your investment technique is tailored to your own involvement and starting point.

I get upset with investment advice that follows an adviser’s portfolio which may have started long before you started following the adviser.  That adviser’s portfolio usually shows a gain, lets say 20%.  You get involved at that point, then it drops by 15% and the adviser points out that the portfolio is still up 5%, so he/she thinks himself/herself brilliant, meanwhile you are down 15%.

I also don’t think there is one strong buy point as a lot of technical analysis will try to indicate.  Often you hear things like “once it crosses the X moving day average” or “after this other thing has a selling on strength day”, or “crosses this level of support” is the time to heavily load up on a stock or sector.

With my proprietary investing technique, I’ve made my strongest gains when I invest in sectors and purchase as a function of my own starting point.  I don’t get emotional and try to predict what is going to happen.  I start my investment when I think the sector is already highly undervalued and continue to build my position as it becomes even more undervalued.

So, at this juncture, I suggest you start to get involved in the miners and potentially begin to build your position.  In the not-too-distant future, I will create a membership section and give a better understanding of how you can use my proprietary investment technique for stable investing and long term gains.  Please join my newsletter to keep updated.