You must be Bold… and you must be Right!
Back in the day, I ran across an anecdote which really stayed with me, but somehow I lost track of who said it. Even doing a Google search didn’t turn up its author. But I intend now to include a quote from that little story, in order to demonstrate an important concept. So if anyone reading this column happens to know its author, please don’t hesitate to write back and let me know!
A survivor of the Great Depression recounted a statement his father had made to him shortly before the outset of that economic calamity. He commented, “My father said that to be a successful investor, you must be bold, and you must be right.” The young man then asked his father, “And what happens if you are bold and wrong?” The father responded, “Well then you just go down with the ship.”
In the post script to that conversation, provided by the now older, but wiser son, he concluded, “Unfortunately, that’s just what my father did.
I would suggest that an investor/trader can, but does not have to be bold. Either way it sure helps to be right – at least part of the time! But the key takeaway for me is that it’s a good idea, almost without exception, to avoid ‘betting the farm’ on a stock, no matter how ‘sure’ you are that it’s going to be the next 10 bagger. You can be bold without betting so much on a single trade, that if you are wrong – you go down with the ship.
Seek to apply the ‘boldness’ of the contrarian who has done his/her homework beforehand. Be ‘bold’ in relation to your emotions, buying when you may be ‘afraid’ – not because of fear per se, but because you know your choice so well that you believe the odds favor your taking focused, deliberate action, possibly buying into weakness on a scale down basis – having decided in advance the dollar/share amount you are willing to commit.
First, of course, you need to carefully study the attributes of your potential stock choice. Then scope out the major trend for the sector. In addition, look at where your target is trading in relation to moving averages, MACD, Money Flow, etc. And, if you’re chart oriented (which definitely helps!), try to determine if there is some kind of formation such as a triangle, flag, a head and shoulders pattern, or at least locate the horizontal support and resistance lines (HSR) for the daily/weekly/monthly bases.
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Tracking the Bulls and Bears. Dr. Alexander Elder describes the vertical price lines a technical analyst looks at, saying “Chart patterns are tracks left by the bears and bulls. A chartist is a hunter who follows subtle signs, known only to those who know what to look for”.
Today we look at two companies – not because they are specific recommendations, and not because they are similar – other than being natural resource companies – in any particular way.
Whereas Tahoe Resources has just begun shipping silver concentrate from its project in Guatemala, Pretium Resources, located in the interior of British Columbia, is (primarily) a gold exploration story, possibly several years away from production. Tahoe’s Escobal project is located near an established infrastructure; Pretium’s Brucejack and Snowfield Properties are more remote. In addition, the two companies arguably have a somewhat different country risk profile.
We chose the charts of these two companies because they demonstrate how being bold – and being right, can pay off for the prepared, focused – and yes lucky, investor. In a sense, the real-life stories they embody are irrelevant to our study – rather we’re trying to see how, or even if we can respond to this particular type of price action.
The first chart demonstrates what can happen if a person is bold…and right. In the case of Tahoe, a rumored negative remark by a government official caused the stock to lose over half its value on an intraday basis. In hindsight, this price decline appears to have been an aberration. Looking at the chart now, it is apparent that a person who was ‘bold’ and who bought at, say at $10, might have made a very nice profit. In retrospect, that person would have been bold – and right (at least for now.)
A Lucky Break or…? The next two charts show Pretium Resources. The daily and weekly charts show two big price breakdowns, ostensibly due to a disagreement between Pretium and one of the two mineral services companies evaluating its bulk sample drill program results.
The weekly chart below demonstrates how significantly the price has changed since its high well over a year ago.
Could these last two charts demonstrate a similar kind of potential for a trader who, after serious study and reflection, decided to be “bold”? We can’t predict the future, so none of us really knows. But a person can certainly study the company, the management, the charts, the situation and the sector, and of course perform a full self – evaluation. And then decide to take a position – or not!
If you are right, you could become a big winner. Just remember the difference between taking a calculated risk, versus rolling the dice on a gamble. The former keeps open the possibility of a way out if you are wrong. The latter just might cause you to go down with the ship.
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