When metal prices were in free-fall and buying gold mining stocks was considered suicide from 2012-2015, this author realized some things. Many investors, for one, don’t understand cycles. Second, they only care for immediate and short term profits, never positioning themselves for when the cycle changes. And third, they can’t see two steps in front of them, and this is the most important competitive edge one can have.

I. Market cycles and human emotions are as prevalent today as they were in the:

  1. 1990’s dotcom bust
  2. Late 1980’s Japanese bust
  3. 1930’s Great Depression
  4. 1870’s rail road bust
  5. 1820 South American sovereign bonds/mining bust
  6. Early 1700’s Mississippi Scheme and South Sea Scheme
  7. and Tulip Mania bust in the 1600’s

The list surely goes on. Before every bust, there was a boom – and as Ludwig Von Mises masterfully wrote, the longer the boom, the harsher the bust. Coincidence that the Roaring 20’s preceded the Great Depression? No.

Thus, market psychology and understanding booms and busts is critical, if not necessary, to help forecast.

II. Secondly, the herd of investors don’t invest for when the cycles reverse. Thanks to the academics in finance who write linear models and theories instead of actually working for profits or losses, many people follow their advice. One can’t blame the laymen for this – ever tried studying econometrics? They ignorantly “buy and hold” as they’re told. What happens when an individual invests in his 401K (which the company puts into some mutual or hedge fund) for years, and just as he retires, the 401k and his private portfolio are both down significantly from a market crash? And little does he know, his 401k and the ‘SP500 ETF’ he was told to buy both contain the same exact stocks (Apple, Microsoft, Cisco, IBM, so forth). His financial adviser told him he was “spreading the risk”. Adding insult to injury, he was paying management fees on both funds.

This author doesn’t believe there is such thing as ‘Passive Investing’, one needs to allocate time and research. What’s the difference between the legendary investors and the layman? The legends bought low and sold high.

During the 2012-16 gold/silver miners bear market, I had a revelation: don’t buy stocks expecting them to go up from good corporate news, a discovery of a deposit, or a profitable earnings report. Buy stocks that can survivethe bear market until the bull market comes back – that is when then they will flourish.

An advantage retail investors have during a bear market is that companies are never rewarded, only punished, even for good news, because the herd doesn’t care. Thus the investor can buy good news, like a world class discovery or a merger, without paying the premium. And once the cycle turns, and it always does, the companies that survived will be re-priced by the herd and rewarded for what they have done during the bear years.
To summarize: invert the original premise before buying – instead of, “what will make this stock go up?” wonder, “what will survive until the market turns?”

Buying gold mining companies in December looked insane, but diligent investors that suffered short term losses to make outsized gains were rewarded.

In January, this author published an article, The Boy Who Cried Gold: Time to Listen, and strongly recommended a handful of select debt free, long life asset, low cost producing gold mines that could survive until metal prices rise. Since then, Teranga Gold (TGCDF) is up 240%, Perseus Mining (PMNXF) is up 130%, Gold Resource Corp (GORO) soared 380% (also their CALL options), and Mandalay Resources (MNDJF) moved 110%.

My content is cherry picking high quality, low P/E & low P/B, minimal/free of debt/, cash loaded gold companies that no one seems to care about – yet – Adem Tumerkan

Now, unfortunately, this author had literally 0 influence on these mining companies and the huge last 6 months they have had. As much as one would like to believe it is his own genius that caused the outcome – it rarely is. And in fairness, anything related to gold or silver is flying since the beginning of 2016, so nothing special about picking stocks that went up during a hot frothy market.

III. Now, the third issue – investors not being able to see two moves ahead – is more problematic. Wall Street is renowned for acting on on immediate news without thinking it through, or its aftereffects. For instance, Janet Yellen came out and said, “we are raising rates by .25%,” in December 2015 and markets acted on her immediate words. She continued on her speech and said, “all is well in the US, although there are still problems, we at the Fed expect our inflation, employment, wages, and growth targets to be met.” The market cheered her words and dumped gold and bonds, and stocks held themselves up – with such a rosy outcast she gave, who would sell equities? Well, it’s 7 months later and the economy is teetering into recession, global growth is done for, EU is crumbling, Puerto Rico defaulted, and many more. Now gold is up substantially and anyone who sold it is banging their head on the desk.

How did things backfire this badly? But Yellen said things were getting better? Why haven’t they raised rates further? Why did GDP come in at .05%, falling for 4 quarters straight?

One needs to look at investments that don’t quite make sense today, but will make complete sense in a few months. Similar to chess, sacrifices need to be made in an earlier move to set up for victory later on. Again – by thinking and acting roundabout, the chess player makes a move that puts himself at risk and appears foolish for now, only to greatly increase his odds and positioning in the future.

In finance, I call this ‘the Speculators Gambit’.

The Speculators Gambit – By buying what doesn’t make sense today and selling when later it does.

(Source: Adem Tumerkan 2016)

To be a good investor, one needs to be roundabout – that means potentially losing money (nominally) in the short run to make big profits later. One has to have vision of two steps ahead. For example, if the Fed is raising rates today, what will that mean 6 months from now? Some bought gold when it hit multi-year lows. Yes, there were losses at first and holding gold looked foolish. But would it be foolish 6 months from now? Simply said, by raising rates, the economy will slow and be deflationary – the exact thing the Fed is trying to reverse. Thus, the raised rates will cause the Fed to cut rates and probably even more later on – today’s inputs are next month’s outputs.

IV. This essay was to explain three issues that greatly are underestimated during investing. Time and time again investors get fleeced by the experts. One must have diligence and patience and common sense, even in a world that is starting to not make so much sense. There is an election in a few months and both candidates have not shown much support for Wall St. Donald Trump even said on national television that the US could just keep printing money and never technically default on our debt. Britain divorced from the EU with the ‘Brexit’ referendum on June 23rd, and it won’t be the last time a country leaves. Two days ago the Former Fed Chairman Ben Bernanke was in Japan and giving them advice on how else to destroy their currency and banking system. Helicopter Money is the answer, he smugly told them, as if he momentarily forgot that the last time they tried such a thing it was destructive.

The strategy involves a central bank directly financing government spending or tax cuts. Japan once implemented the measure in the 1930s-40s and ended up stoking sky-high inflation, says the WSJ.

Yet, US major indices such as the DOW and SP500 are somehow breaking record highs. Global bond yields are trending lower and lower – the US 10 year bond already hit new record lows @ 1.34%. The EU and Japan are already negative.

Gold and silver has only just begun.