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Percentages Versus MultiplesMike Hoy Welcome everyone to 2006 and all the exciting things, I believe; we have in store for us this year. I think years from now most of us will look back on 2006-2007 with some very fond memories of the money we made in the second leg of the "Great Bull Market in Gold." Unfortunately, I believe the public as a whole will be in for some very disappointing times. Over the last year there have been several events which have developed and continue to develop which, in my opinion, are the triggers that will bring an end to many of the commonly accepted business practices of our government and financial system. The end result will change the future and the lives of everyone for as long as we live. I cannot emphasize enough the importance of understanding that the way of life the world has accepted as normal for the last two decades is nothing more than a time bomb whose fuse has now been lit. Whether this bomb explodes in 2006, 2007 or even 2008 is totally irrelevant. The important point to understand is the fuse is lit. For those who do not understand or refuse to accept the fact that the last two decades ushered in the end of the new economy rather than the beginning; then the fate of those caught in the path of this blast will not be pretty. I most definitely do not plan on becoming a victim to what lies ahead. Hyper-Inflation! I believe we have now entered the hyper-inflationary cycle. Our government can now blame Katrina as the scapegoat that triggered the hyper-inflationary spending; even though we all know that this is the exact path they were going to take anyway. I have no doubt that deficits and red ink will flow like water over a waterfall. It is after the hyper-inflationary stage that I expect to see very serious and tough economic times. I expect to write several articles this year for both public posting and to those on my e-mail list outlining the very dangerous path our leaders will undoubtedly take us down I have written many articles outlining the need to get fully exposed to the precious metals and natural resource sectors. In a recent article I wrote titled "This is what it's all about!," I discussed my belief in that I felt we are entering the second leg of the bull market in gold and that I felt Junior Gold and Silver Stocks were very timely investments. As it turns out my timing on that article was pretty good as the Junior Stocks have made some very profitable moves. These moves have coincided with the breakout in gold prices. It is also very important to understand that in this stage of the bull market precious metal stock prices are going to receive increased valuations based upon the old adage of "a rising tide will lift all boats." We need to understand that the old valuations, we are all so accustomed to seeing everyday, are going to be elevated to much higher levels as a result of new money finding its way into our companies. It will be a major mistake to sell stocks we have owned simply because the valuations seem to be much higher than we are comfortable with and accustomed to seeing. WHAT'S NEXT? I have received many e-mails recently from readers wondering if they should take profits from recent gains they have made on their investments. They have also asked me what I think gold will do over the short term. Many are worried that the profits they have made will be erased if gold has a correction. These are not easy questions to answer as there are several criteria that need to be addressed before a proper decision can be made. First to be addressed is the fact that as current investors in the precious metals sector we are the "Pioneers." Until recently I would guess that well less than 1% of the investment community had any exposure to the precious metals sector at all. It is very important to recognize that our numbers are growing and that one day the talk all up and down Wall Street will be gold and the precious metal stocks. Very large amounts of money are going to begin finding a home in the companies we own. This is an extremely important point to understand as the profits that will be generated from owning and holding the right companies will make the difference between making a percentage return or a multiple return on your invested capital. Markets always move to extremes and I believe we have just begun to see the precious metals sector reborn after more than two decades of being out of favor. We are just beginning to exit the low stock price extreme. As an example of just how far behind us, (investors who understand the necessity to being exposed to the precious metals sector), the rest of the world is; just think about this point for a moment; very few pension and retirement plans offer their employees an investment of any kind that allows their participants to invest their retirement savings into gold and silver stocks. Think of the money that will become available to the precious metals sector as this bull market moves forward. I anticipate that by the time gold has run its course all the retirement funds will have a precious metals fund to offer to their participants. There is a tremendous amount of money that is going to find its way into the companies that we own and I think the risk of attempting to trade these companies in hopes of buying them back at cheaper prices is only going to make one entity happy and that entity is "Good Ole Uncle Sam" as you ante up your profits to pay the taxes on your short term capital gains. The first thing that you as an investor should do is think about the type of correction your stock would have to make in order for you to just break even after taking into consideration the taxes that you would owe on selling your stocks. Not only do you risk being out of your stocks but you also risk having less money to repurchase those stocks if the stocks do not pull back far enough to justify the attempted trade. The second point to consider is the fact that as this bull market in gold continues to materialize bringing tons of new money and attention into the sector; we will find that a year from now there may be no such thing as a good well managed junior mining company trading below $1.00-$2.00/share. Many of us have been involved with the junior mining sector for years, if not longer, and we have forgotten or may not even be aware of the fact that as this sector fully awakens any junior mining stock with anything at all going for it is going to be trading in the $1.00-$3.00 range. Yeah, I think this is going to happen again and it may be this year and I want to be onboard to fully reap the rewards for the time and patience I have involved with these companies and this sector. I believe timing could not be more perfect than it is right now and has been for the last several months. I wrote in an earlier article in which I stated that "I do not remember any producing gold companies trading below $10.00/share back in 1980-81 when gold peaked out above $850/oz. In fact, gold stocks continued their bull market well after gold peaked. Do I believe the same thing will happen again? You bet I do and the best part of this whole equation is the fact that there currently exist gold companies trading below $.50/share in today's market that could very easily become producing companies within the next two years. The most important point to this argument is the fact that many of these stocks are trading below $.50/share giving investors, who are sophisticated enough to find them and recognize them, an opportunity to buy a substantial position in shares which would be worth a fortune if the management delivers results and value to their shareholders. I am not going to talk about any specific companies in this article but you can send me an e-mail, from the link below, to get on my free e-mail list where I talk about specific companies Another point I want to address is the belief that investors should take their investment capital off the table as an investment doubles so as to recover their initial purchase price leaving the profits to ride. I see two problems with this line of thinking. First is the fact that this thinking does not take into consideration the possibility that many stocks could be viewed as being a better investment today, at a much higher prices, than they were when the stocks were initially purchased at less than half the current price. This could be as a result of successful drilling programs coupled with an excellent management team. When I find companies I own where management has stepped up and built big time value for the shareholders I want to be a buyer and not a seller. I do not care about the fact that I have doubled or tripled my original investment. What is important to me is whether or not management is building value for me as a shareholder. I do not find it acceptable to sell shares only because my stock has appreciated. The opposite of this is true as well. If a company fails to deliver on their business plans or if management has failed to accomplish goals they have set; then I view these as material changes and I will sell my shares. Management is the main reason that companies fail to deliver on business plans. I will automatically sell shares in companies I own when I recognize that management has failed because their original goals and expectations were unrealistic in the first place. I have very little patience with management teams that fail due to their own shortcomings. Markets like we have now are a perfect time to liquidate positions in companies that fall into this category. I love being able to exit a position, at a profit, where circumstances have not worked out the way I had originally expected when I made my initial investment. Opportunities like this are a gift that keeps on giving. I will also take profits when
I feel a stock has gotten way ahead of itself. If I am lucky
enough to own a company that the investment community gets overly
excited about I will sell shares and take my money off the table.
There are several of these in the markets right now. Poor management
and over-valuations are two excellent reasons to take profits
or liquidate positions entirely. It is very complicated to decide
whether a company is overvalued or was just playing catch-up
as a result of being undervalued to begin with. The timing on knowing when to sell a stock that is going up to buy one that may be doing nothing at all or going down is a very complicated matter that can make us all look foolish. I am sure that if we are honest with ourselves we will all fess up to the fact that our experiences and returns from this type of strategy are less than if we just left our initial investments alone to continue to grow. As any experienced investor will tell you; timing is of the utmost importance and in order to have a chance at success emotions must be completely eliminated. I have very seldom been successful at being able to sell a stock while showing the patience to wait for it to correct in hopes of buying it back cheaper. If a person is to become a successful trader he or she MUST be able to sell his or her stock at a time when all he or she wants to do is brag about how well his or her investments are doing to his or her friends. I have met very few investors who possess the discipline to trade. A CORRECTION IN THE PRICE OF GOLD? Now we get to the topic that many people are using today for taking a profit out of their gold investments; an intermediate top in the price of gold. This is of small importance to me as I believe a year from now gold will be substantially higher. If gold is substantially higher a year from now does it really matter if gold retraces part of its recent gains on its way to much higher long term values? Doesn't make a bit of difference to me as I believe if gold is higher a year from now then my companies will also be higher as a result. Not only will my companies be trading at much higher prices but the market will value these companies at a higher multiple as a result of gold prices being higher. Owning precious metal stocks that are producing will be a very profitable venture as gold prices rise. Gold producers will make more money selling gold at higher prices and the market will reward producing companies with higher multiples as a result of the bull market. This is exactly the same as a bull market in traditional stocks where investors take price earnings ratios from their historical average of 14X to much higher levels. With gold going to the levels that I think it will; rising expenses such as fuel will not be able to slow earnings down in relation to the increased income that will be generated from rising gold prices. Why would I want to risk being wrong about a short term pullback in the price of gold and risk being caught out of my stocks as the market decides it is time to deliver new and higher multiples to the sector? I wouldn't. In the end I believe the odds favor holding positions in well run companies and in the event of a correction; back the truck up and load up. Corrections are an opportunity to buy the size position we should have bought in the first place. We truly do have some exciting times ahead of us in 2006-2007. I do not want to risk taking a percentage profit and miss out on making multiples. As always it is very important for each of you to do your own homework. The more knowledge you have about each company you own the easier it is to determine whether or not management is delivering on their business plans or just putting your money in their pockets. Likewise, everything written here is how I value my individual investments. It is up to each of you to determine if my investment strategy should be adopted by each of you. Your beliefs, opinions and investment goals may differ from mine. For those of you on my e-mail list I plan to write an update on the stocks in my portfolio after I come back next week from Vancouver. I expect my trip to Vancouver to be very rewarding. Do not worry if you have not seen any e-mails from me lately as I have not sent anything out in quite a while. This too will change in 2006 as I plan to do a lot more writing and e-mail updates. I am very excited about what I see taking shape for 2006. Mike
Hoy 321gold Inc |
