As mentioned last week, I attended this year's New Orleans Investment Conference along with Doug Casey, Marin Katusa, and our CEO, Olivier Garret. It was fun to see many old friends among the attendees and other speakers, but the most interesting thing was an experiment I conducted as part of my main room speech.
You see, there had been a talk earlier in the conference on picking “ten-baggers” (stocks that go up 1,000%). Now, there's nothing wrong with shooting for ten times your investment in a highly volatile stock. It's neither a crazy nor a hyped-up claim – we've had many ten-baggers in our portfolios, including Silver Wheaton (SLW) and First Majestic (AG). But it's not easy, and many of the nano-cap stocks that offer that sort of potential do the opposite and drop 90% – if not all the way to zero.
So I asked the audience to raise their hands if they wanted ten-baggers in their portfolios. About three-fourths of the audience put their hands up. I didn't take time to count the hands, but it was a lot of people – several hundred.
I then explained the realities involved:
- Big, stable, safe companies – almost by definition – do not offer ten-bagger potential.
- Nobody can tell you in advance which tiny, high-risk play is going to be the next ten-bagger. The best one can do is identify a “basket” of stocks with ten-bagger potential, and hope the ones that work out more than cover the losses on the ones that don't.
- The people who make money using this strategy understand that they will lose money on most of their stocks. Let me repeat that: to go for ten-baggers, you must accept that more of your stocks will lose money than will make you money.
- The math is simple: you can lose 100% of your money on a high-risk stock, but you can only lose 100% – while there is no maximum gain.
So, yes, ten-baggers are possible. Some highly-volatile junior stocks go 50 to 100 to one. (GoldQuest Mining, V.GQC, is a recent example of a 50-bagger.) So, the strategy for pursuing ten-baggers is to buy ten exceptionally high-volatility stocks, write off the three that go to zero, shrug off the three that drop 30% or 50%, accept the three that gain 30% to 50%, and laugh all the way to the bank when the one long shot goes up 1,000% and more than makes the rest worthwhile.
But if you do this, you must realize that until the ten-bagger makes its discovery, transition, or whatever it's going to do to shoot through the roof, it's going to look like any of the other mediocre or losing positions. (Only in this context can 30% to 50% gains be considered mediocre – and we do, here at Casey Research.)
In other words, you have to have nerves of steel to do this, or you'll panic and sell all your “idiotic penny stocks” and wonder what lapse of sanity ever prompted you to buy them. We've seen this again and again.
I have to wonder how sick to the stomach those who sold GoldQuest at four cents a couple months ago must have felt when they saw the stock shoot up to over $2 on a fantastic new gold discovery in the Dominican Republic.
After explaining these things to the audience and stressing again that the only way to reliably go after ten-baggers is to accept that one will have more losses that wins (and the wins will more than make up for the losses), I asked for another show of hands.
I kid you not: about three people raised their hands.
This confirms something I had long thought, but for which I had not previously had empirical evidence: most people don't have what it takes to be high-stakes speculators. Fair enough – if an investing strategy does not suit one's temperament, one should not try it.
But fortune does favor the bold.
Fear not; I would never try to twist anyone's arm to buy high-risk stocks. I only pursue this strategy with a small number of alert-service subscribers who understand the math and have the temperament to go with it. That service is on a waiting list at present, because seats are strictly limited.
Our BIG GOLD publication, on the other hand, is focused on much less volatile stocks with excellent upside and leverage to rising gold. In the International Speculator, we shoot for stocks with growth on tap that offer the potential for 100% gains. That's plenty of joy, but the odds are not so long: over time, we win on more of these picks than we lose.
So now you know; the high-stakes table is not for everyone – and that's okay. There are different ways to invest, and every investor should carefully assess his or her temperament – and especially tolerance for risk – before settling on his or her investment strategy.
I hope you will all do this important introspection and determine the right strategies to pursue in the volatile and – we're convinced – highly profitable times ahead.
Senior Metals Investment Strategist
|Rock & Stock Stats||
One Month Ago
One Year Ago
|Gold Producers (GDX)||49.76||53.59||59.96|
|Gold Junior Stocks (GDXJ)||23.20||24.55||31.40|
|Silver Stocks (SIL)||24.37||25.03||24.01|
|TSX (Toronto Stock Exchange)||12,380.41||12,391.23||12,241.76|
Gold and Silver HEADLINES
German politicians have initiated an audit by Bundesbank to confirm the country's gold reserves, the majority of which are stored in offshore banks. Germany is said to possess 3,396 tons (109 million ounces) of gold reserves, the second-largest in the world after the United States. More than half of that is stored with the Federal Reserve Bank of New York, which, according to some media reports, refuses to allow Bundesbank staff to even view their gold. This raises suspicions that the gold reserves may not all be physically present – as would be the case if some of the gold had been lent out.
A German audit may push other central banks to check up on their gold, too. And if it's revealed that governments hold less gold than previously believed, the gold price would react dramatically.
“According to the latest release from the Hong Kong Census and Statistics Department, China had imported a whopping gross 512 tons (16.5 million ounces) of gold through the end of August, 10 tons (0.3 million ounces) more than the latest official ECB gold holdings,” Zero Hedge reports. During the eight months, China imported more gold than during entire 2011 and four times as much between January and July 2012 than in the same period last year. It's obvious that China's appetite for gold continues to grow.
Meanwhile, it was reported in Australia that gold recently surpassed coal as the second most valuable export to China, surging in the first eight months of this year by an incredible 900%. These amazing statistics about gold received little attention in mainstream news headlines.
RBI Restricts Bank Loans for Gold (Mineweb)
The Reserve Bank of India (RBI) has asked banks not to finance gold purchases. Earlier, the RBI prohibited banks from lending money for the purpose of buying gold bars, and now they've been restrained from funding gold purchases in any form.
This is yet another gold restriction implemented by Indian officials. The purpose is to curb consumer demand and cut gold imports into the country in order to improve the budget deficit. During the first half of the year, gold demand in India eased because of a weak rupee and these prohibitive actions by the government. Gold demand in the country remains relatively stable at present, as festival season kicks in.
This Week in International Speculator and BIG GOLD – Key Updates for Subscribers
- Having delivered more bonanza-grade intercepts in October, this company continues to be a Best Buy. Read our extended recommendation update.
- This explorer is selling for less than cash and securities – hence our Best-Buy recommendation.
- With an excellent project in Europe and a mine in the making in South America, this company is one of our favorite development-stage juniors.
- Seven BIG GOLD producers have filed quarterly reports since October 29 – get the latest comments on your favorite companies by checking out the portfolio page.