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Stop Losses…Active Trading…Hold Periods and Rationales: When One Mailbox Question Triggers A Big Response

I have a question about your risk management. I observe that you use no stop-limits and see that you have few/many stocks in your portfolio which are -50%, up to -70%. Some weeks you sold some stocks with a big minus. On the opposite you have some winners. Your total performance is not clear for me and I don't understand why you don't sell earlier. For instance others are selling if the stock falls 20% below the price of buying but you hold them. From my point of view you hold it too long ...
I am new subscriber and I really don't want to lose my money and therefore I am a little bit concerned about your risk management.
For instance why you still hold "Visionary Gold"? More than 50% you lost within the last two months. At your service I miss an active money management or maybe I don't see it. As subscriber I have a little bit the feeling that you are too close with the mining companies and the service sounds more like marketing for them. So my feeling is that they are your "real" clients ... sorry to saying this but I have this too much in my mind.
Reader GR

I got a great question from reader GR about Stop Losses and why I don’t use them. The answer is: I should.

For those unfamiliar, stop losses are sell orders for stocks at set downside prices. Putting such sell orders in place stops your loss if the price falls a certain amount.

Stop losses are common and useful. They make lots of sense for low-risk portfolios, as low-risk stocks are (by definition) not volatile and so if a stock declines to a stop-loss level it is likely a fundamental move, whether specific to the company or related to the broader market.

The reason I have always shied away from Stop Loss orders is that junior resource stocks can be very volatile. As such, Stop Loss orders can have you sell a stock on a volatile down day that ends up working out well.

It all depends on the range you’re willing to tolerate. Take Vizsla, for example. Say you bought the stock in July at $2.55. Not willing to lose 20%, as GR suggested, you enter a Stop Loss sell order at $2.00.

In August the stock dips below $2 and you sell your position.

Today, just three months later, VZLA is trading at $3.45.

Of course I chose this example to show the risk of Stop Losses. There are lots of examples, especially over the last year, when a Stop Loss order would have worked really well. Visionary Gold, as GR references, is a good example. A Stop Loss at 20% below my entry price of $0.18 would have had me exit, down only 20%, at $0.16 instead of riding this explorer all the way down to $0.09 and then back to $0.12.

I can go back and forth with examples for ages.

Silver Tiger – a 20% stop loss would have had me sell my stock back in December at $0.40 and missed its run to $0.75.

GGL – I would have avoided its slide from $0.18 to $0.11.

Great Bear – had someone bought in late 2018 at $3, a stop loss would have given up their position six months later at $2.40 as it slid to $2…shortly before the stock ran to $8 (and up to $21 from there).

Heliostar – a stop loss would have gotten me out with a 20% loss instead of being down 40%.

The Heliostar example goes further. I was very optimistic on HSTR at the beginning of the year. I even named Heliostar as one of my Top Pick stocks. But it did not deliver this summer. HSTR was down from $1.30 at the start of the year (close to my entry point of $1.35) to around $0.83 now. A 20% Stop Loss would have had me sell when the price first dipped below $1.04 in March.

And that would have been the right choice, in hindsight. But the thing with exploration stocks is that you never know when hot news might hit. The stock could have been in a very different place right now depending on a lot of variables.

Of course that is not how it played out, and so Heliostar ends up an example that supports using Stop Loss sells.

Let’s use a more dramatic example: IsoEnergy. Here the stock has skyrocketed in the last two months because of the commodity it targets – uranium – rather than because of its own news. But buying ISO is primarily a play on the uranium space, so it fits. Uranium jumped in August because the Sprott Physical Uranium Trust entered the space and started buying in the spot market. That event was four months in the making; Sprott bought Uranium Participation, the small version of the trust it now runs, in April and it took till August to jump through all the regulatory hoops.

If you predicted, correctly, that Sprott’s new uranium vehicle would light up the uranium sector, you might have started to position in the summer. You might have bought ISO, then, at $2.75. A 20% Stop Loss order would have had you exit in either late July, when it dropped to $1.99, or in mid-August, when it traded down to $2.05 just days before SPUT debuted and sent ISO to $6.50.

Volatility is very real in the exploration space. It comes from metals, the prices for which often move dramatically. It comes from exploration results, which can create and destroy market value in an instant. And it comes from the rest of the market, where events outside of metals can force funds to dump or buy stocks en masse.

There’s also the basic argument that pre-discovery explorers, almost by definition, are worth very little until they hit a discovery. And that ‘little’ amount often slides as time passes and early investors drop off. But if they do hit, value appears again as if out of nowhere. And so Stop Losses are as useless in those contexts as trying to time an entry point.

And there’s the idea that I presented when I used Silver Tiger as an example: timing is almost impossible. It’s impossible to know when a hot drill result will hit. It’s impossible to know when a takeout offer will come. It’s impossible to know when the gold sector as a whole will light up. I bought Silver Tiger as leverage to a rising precious metals market, because a great and growing asset in a good place being advanced by a top notch team that has sealed five major wins to date is something I wanted to own as silver and gold rise.

If you have a foolproof way to time that – the real start of a precious metals bull market – let me know. Being early is similar to being wrong but being late means losing out on big gains.

Since volatility in this space is very real and since discoveries cannot be predicted and since timing is so hard, I have always ignored Stop Losses, convincing myself they would stop me out of positions that I still want to own. But GR’s email made me think that a more nuanced approach is needed. (Yes, you would think I would have come up with this a long time ago.)

Here’s how the new concept is shaping up:

  • I should set Stop Losses at 30% down for each position. Using 30% rather than 20% gives a bit more leeway for volatility while still protecting 70% of my investment
  • Stocks that I sell because of a Stop Loss may well still have potential and so I should continue to follow them (not officially in the letter – too many stocks! too much writing!! but on the side). Heliostar, for instance, is set to drill in Mexico this winter and I like the look of those targets. But had I employed a Stop Loss and exited, I could have stayed on the sidelines and bought back when those results are pending in January or February.
  • When stocks are up 50%, I should routinely sell half to reduce my cost base and also reset my Stop Loss to sell at 30% down.

Happy to take input on this, as it’s an evolving concept! I will think it through more over the next week and implement it thereafter.

Now to address the other parts of GR’s question.

  • If you don’t want to lose money, junior mining stocks is a tough game. Just want to comment on that as a starting point.
  • More active management: GR is right that I am not a trader. As I’ve outlined here, I could and perhaps should have implemented Stop Losses earlier and reduced my losses. (I have been better at managing gains than losses, by selling some to reduce cost base.) That said, the fact that entering and exiting stocks quickly can be tough for readers to follow has always inclined me to buy and hold as long as the investment thesis remained intact. I realize that an investment thesis rests on a valuation and that a sliding share price changes that valuation foundation, but when a whole sector is sliding the context is changing along the way… Whether more active trading is something my readers want is a question I hope folks will answer for me, via emails to, over the next week or two.
  • I do not consider companies as clients in any way. My only goal is to help my subscribers. I don’t take money from companies and have nothing to gain from buying, selling, or holding companies in the letter. That said, I am human. As such I do fall for some stocks harder than I should. It’s one of the hardest parts of investing: not falling in love with certain stocks. Doing so makes anyone hold longer than makes sense. And I have made that mistake before, no doubt. I might add that the romance of discovery potential makes me give exploration stocks more leeway on the downside than I should. I am likely also swayed by the fact that I know the people and it is harder to publicly sell a stock when I know good people are working hard and taking good care of shareholder money, but just not getting the break needed from the rocks or the markets (or both). I hate but have to admit that these factors sometimes have me hold stocks longer than I should. I actively try to acknowledge these biases and negate them but, again, I’m human so it’s not a perfect science.

GR’s question certainly raised a lot of issues for me! If you have thoughts on Stop Losses, more active trading, or hold periods in general, please do let me know.

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