There are few sectors in the global market where passive investors are able to sustain high earnings in the current market. Among the most alluring opportunities are emerging market property, and both IT and resource equities (i.e. exposure to commodities through mining). In the commodity market, one is exposed to substantial volatility; a dangerous leveraged exposure for the untrained eye. We argue that you don’t need to expose yourself to leverage in order to achieve high yields or asset growth. We will argue that in the mining sector, it’s not our capacity to take risks that differentiates yourself as an investor, it’s your capacity to conceptualise (and plausibly to quantify) the risks that will differentiate yourself from other investors.
Warren Buffet consistently makes huge returns for his investors. He does so by making use of others money, and by making ‘sure bets’. The consistency of his investment performance lies in the systematic nature or discipline of his investment strategy. His strategy however rests on using other people’s money. Our alternative strategy is to differentiate yourself in terms of knowledge rather than leverage. We outline a strategy for non-leveraged high returns. The reason why these investments are so lucrative is because few investors take the opportunity to develop their analytical skills to place themselves in a position to identify these opportunities. The government’s tax concessions for superannuation only reinforce the tread towards ‘centralized planning’ for personal savings; in the process disempowering the investor. Just as middle class investors are now discouraged from investing in mining, so are the fund managers (mostly accountants) who don’t readily grasp geological and mining concepts. Their investment criteria are intended to serve them (with large pools of money); not your modest needs. They cannot invest in small companies that you can, because of their need for liquidity. You are therefore compromising your interests by investing with them.
Most investors find investment overwhelming and associate it with a great deal of apprehension. This is an entirely negative perspective of finance that we want to address. Making money should be a source of efficacy and pride. The reason people find it overwhelming is because they have not had sufficient or systematic exposure to the topic. This is indeed very tragic because the implication is that there are a great many people who are allowing their lives to be motivated by fear. Worse still is that they are enabling others to use fear to solicit certain outcomes. They sanction politicians to sensitize your fears; they pay commissions to fund managers and their associated ‘sales spruikers’ to placate your fears. The contemporary wisdom of fund managers, affirmed by academics who have never traded investments, is that risk needs to be avoided through diversification. This is their modus operandi. We accept that risks exist; but these people convey that you should accept this ‘passive’ as an inevitable market condition. We repudiate this premise because it denies certain facts (like resource companies trading at half their cash value); it diminishes people control over their personal savings; as well as ignoring the ultimate value proposition of investing; a sense of personal efficacy and pride beyond one’s career. Modern Portfolio Theory was employed by the fund management industry as a rationalisation to encourage investors to ‘avoid knowable’ risks so that they could accept exposure to systematic risk by placing their money with them. They do not deny that there are systematic risks; they simply argue that those risks will be overshadowed by long term returns if you invest for 40-50 years. This is a rationalisation of course which serves their interests. Meanwhile investors are paying the opportunity cost of exceptional returns that exist because they have discouraged investors from seeking ‘specialised knowledge’ which would allow them to differentiate themselves from others.
The paradox is that the opportunity for exceptional returns in the mining sector exists because of the popularity of their approach to investors; and because of the governments ‘boom-bust’ paradigm of stimulating markets to a point where there is a ‘yield cliff’ followed by a ‘fiscal cliff’. These systemic risks will result in the greatest transfer of assets that you will ever see. How do you explain commodity prices quadrupling in a matter of years? What lack of planning or market distortion precipitates that? Only to be matched by a corresponding market collapse. These are the types of risks that need to be understood. A mindless diversification strategy will not protect people.
You might want to question where you place your hard-earned cash given that we are just about to enter another stage in the global commodity cycle; during which there will be a huge expansion in mining ‘volumes’ rather than ‘prices’. We are about to experience an unprecedented expansion of industrialisation on the basis of 20-years of low inflation (i.e. low wage pressures) and high employment uptake in emerging markets. Talk of a fiscal cliff and high debt levels will quickly evaporate, and the focus will be upon global harmonisation and integration. There are no better markets to buy mining stocks than Australia and Canada, however investors will find the Australia market easier to set up a bank account. I have been investing in speculative mineral resource stocks for over 30 years. My latest book ‘Global Mining Investing‘ (link) is the culmination of this experience and analysis. In it I reveal all the pertinent factors to consider when buying mineral resource stocks.
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