Weekly Update: Week Ending 25 November 2011

To calculate the weekly performance on my portfolio I take the close from last Friday to work out the percentage increase/decrease in each stock. This is compared to the ASX 200 (Code: XJO) and the Small Ords (XSO). The Small Ords is comprised of companies included in the ASX 300 index, but not in the ASX 100 index. I include the Small Ords in my comparison as it helps highlight the markets appetite for risk.

Market:	Close (Friday 18/11/11):	Close (Friday 25/11/11):	Percentage Change:
XJO	4177	3984	-4.62%
XSO	2355	2254	-4.29%

First up, sorry this one is a little late, work got the better of me. Any way last week was fairly disappointing with the market down over 4%. I read the other day that this has been the worse Thanksgiving week in the markets (US) since the 1930’s. As usually the red on the screen coincided with an increase in articles about how the world is doomed from the mass media who have no clue about what is actually happening. I don’t worry about these headlines anymore, I just focus on the fundamentals of the company’s I invest in and the industries in which they operate.

Code:	Weighting:	Share Price Friday (18/11/2011)	Share Price Friday (25/11/2011)	Percentage Change:	Weighted Change:
OBJ	21.82%	0.022	0.019	-13.64%	-2.98%
MHM	9.95%	1.070	0.945	-11.68%	-1.16%
KGL	25.02%	0.110	0.110	0.00%	0.00%
Cash	43.22%			0%	0.00%
TOTAL	100.00%			-8.440%	-4.14%

The worse performer of the week was OBJ, who got smacked down 13.94%. It was a bit of a shame that it dropped so hard, but I guess that’s what happens when people get scared of global events and don’t consider company fundamentals. MHM was also down 11.68% but this was not entirely unexpected. Why? Well last week it was up 10.31%, the week before that 12.79%, the week before than 9.55% and the week before that 15.44%. So I guess one down week can be excused.

Kentor Gold remained flat and the overall the portfolio was down 4.14%, which was a little less than the broader market.

Code:	Weighting:	Share Price Friday (18/11/2011)	Share Price Friday (25/11/2011)	Percentage Change:	Weighted Change:
OBJ	38.43%	0.022	0.019	-13.64%	-5.24%
MHM	17.52%	1.070	0.945	-11.68%	-2.05%
KGL	44.06%	0.110	0.110	0.00%	0.00%
TOTAL	100.00%				-7.29%

Removing cash shows the impact of the large down move in OBJ and highlights an overall decrease of 7.29% on the value of stocks held within the portfolio.

Code:	Weighting:	Purchase Price	Current Price:	Percentage Change:	Weighted Change:
OBJ	22.94%	0.023	0.019	-17.39%	-3.99%
MHM	11.17%	1.195	0.945	-20.92%	-2.34%
KGL	22.42%	0.098	0.110	12.24%	2.74%
TOTAL	56.53%				-3.58%

Overall the portfolio remains slightly underwater, down 3.58%, which is nothing to worry about. If you have just joined my blog I focus on long term fundamentals and expect the real returns to come when each of the above companies release their product/technology/move into production/etc.

Why Germany’s “Bond Auction Disaster” is Actually Positive

This morning we woke to news that Germany failed to get bids for 35% of the 10 year bonds that they offered for sale overnight. This is important because Germany is the strongest nation in Europe and if they have trouble raising capital why would alone want to touch the debt of other countries such as Italy and Spain.

Now while the mainstream media are harping on about this being the start of a flight out of the Euro Zone and another step towards financial implosion I take a different, more positive view. Over the last two years Germany has felt largely “immune” from the disaster. Yes, they have been annoyed at having to bail out their fellow Euro Zone members and there were/are concerns about a wider economic slowdown throughout Europe but other than that, the fear of debt (and the inability of Germany to raise it) had not gripped the German people or their Politicians.

What the failure of last night’s bond auction shows is that all debt, regardless of who issues it, is being treated like the plague. Germany can no longer afford to see the inaction that has gripped Europe continue for too much longer otherwise they will be dragged down with the rest of them. And herein lays the positive. Germany now has no alternative but to fix this mess and fix it swiftly.

Previously everyone had been negotiating to try and limit the “damage” (or liabilities) to their own country, but if Germany is under pressure, everyone is under pressure and any attempt to limit damage or negotiate around the issue is a moot point. I now expect the European leaders will get together and push forward with a new, stronger and more decisive mandate. I expect this will be a combination of austerity measures (to bring government spending under control) followed by a massive quantitative easing program that will start from the European Central Bank and filter funds down to the individual countries.

This will serve two purposes. Firstly countries such as Spain, Greece and Italy will be forced to bring their budgets into surplus, or at least not run a massive deficit, and the massive printing program (which in layman’s terms is issuing bonds that are then bought with printed money) will place the debt with the ECB rather than at the individual country level. Sure it is a bit of phoney accounting, a bit like ignoring the fact you have a massive loan owed to your mum and dad, but on the surface it looks like the debt burden of each country is significantly less.

Sure we all know it is not a complete fix to the problem, but perhaps it can bury the issues long enough for the European economy to recover and individual countries strengthen their balance sheets.

Is this a viable lifelong strategy? And A New Definition For Risk

Today someone close to me asked if this is a viable lifelong strategy and it has left me feeling a little bit deflated. Not because I don’t believe that I can make it but more so because it feels like your goal/lifelong dream is being questioned.

Now, I am not under any delusion as to how hard it will be to generate a living from the market, nor how long it will take for the companies I invest in to reach their full potential. I also don’t want to lie and say that if one of my stocks goes up ten times I’ll be a multi-millionaire, because that is simply not the case. To turn this goal into a reality I really need one ten bagger from which I can then enter another couple of stocks with three to four times what I put in my first few (OBJ, MHM & KGL). This is the value of compounding and each successive win means I have more capital to put into my next stock.

Right now the risks are the greatest because I already have three stocks and only room for maybe one or two more. From those five companies one or maybe two will fail but the gains from the others should more than offset those losses. If this occurs then I will have a larger capital base and my future portfolio could probably accommodate up to six stocks, with a bit of cash for short term opportunities and a cash buffer to protect against more than 50% of the portfolio crashing to zero (i.e. ensure I have money to come back in the event of a worst case scenario).

Finally I don’t necessarily classify my portfolio as “high risk” because if you have conducted the research and understand the fundamentals of the company then it should be “known risk”. High risk to me sounds like some useful catchphrase from which people can justify poor investment decisions. Why would anyone invest is something that is “high risk” unless they are gambling. It is a non-sense saying made to satisfy the demands of the ignorant. I apologise if I have used the words “high risk” in relation to my stocks in the past, but it was probably to make sure people understood what I was taking about in a general sense. From now on I will use my new phrase (not sure if it’s been used in investment terminology before or along these lines) but I propose the following definition:

“known risk in relation to a stock (or portfolio of stocks) that are anticipated to generate a high rate of return refers to the ability of an investor to understand the fundamental components of the company, the industry in which they operate and other external factors which may affect their future performance. Taking all these factors into consideration the investor calculates a future share price or market capitalisation that is likely to be five to ten times that of the company’s current value.

If the share price then falls by a considerable margin this is not an unpredicted event, but one of the considerations accepted by the investor when making their investment decision. I.e. The Investor chose to invest based on the likely return, but with knowledge that the return was conditional on a set of targets or objectives.

Known risk should not be used when referring to any investment that involves “hit and hope” exploration, companies with poor management or no/limited future of financial performance or security. These should be classed as poor investment decisions. I.e. there is no risk because they will only ever go one way, down”

Jervois Copper-Silver-Gold Mine Development Study Makes Strong Progress

Yesterday Kentor Gold announced some initial results on the scoping study being undertaken on the multi-metal mine at the Jervois Project in the Northern Territory. It is not a hugely exciting announcement by any stretch of the imagination, but is an important stepping stone that is required to take this project forward.

The best overall response from initial testing indicated the production of a concentrate with a grade of 26% copper at 94% recovery. Testing is also being carried out on some of the lower grade material to help measure the variability in metallurgical performance.

The announcement then does on to state that Hellman and Schofield who completed the initial inferred Resource estimate have commenced an upgrade to the recent resource model incorporating the recent drill results. They don’t provide any timeframe for when this will come out, but I assume it will be in Q1 2012.

Kentor has also appointed Auralia Mining Consulting to run pit optimisation and schedules on each resource deposit at Kentor. With other consultants engaged for geotechnical and water treatment assessments.

The results of the scoping study will be available in the first quarter 2012 and it is anticipated that this will lead to a full feasibility on the project in 2012.

Link to announcement