Things To Include In Your Trading Journal or Blog

Following on from yesterday’s post I thought I would comment on some things that I feel are very important to include in any trading journal or diary. The obvious ones are the date when you purchased the stock and the price you paid, but some other ones worth considering include:

·         A summary of the reasons why you purchased the stock. For a fundamental investor I would be looking to detail why you think the company will be able to increase their operations (e.g. one a new mine) , why the underlying commodity may increase in price (e.g. increased investment demand gold) or if there is the potential for the stock to re-rate and become more closely aligned with its peers (e.g. P/E ratios or in ground valuation of gold, etc). For traders I would include information on what technical indicators or metrics led to your decision to buy or sell a particular stock.

·         A detailed list of future expectations based on your research. For the fundamental investor this would include things like the company achieving a certain rate of growth or establishment of new mines or operations and what that would mean for the share price. It is important that this information considers the facts and is not just some fantasy dream that you hope will occur. For the trader this will be solely priced based, but it is also important to note the expected timeframe for each of these items. You could also comment on how much volatility you expect while holding the position as this can have an effect on your frame of mind and ability to hold during down days.

·         Your exit rules. This is probably the hardest thing for a fundamental investor as we usually ignore the short term noise associated with a stocks share price. I would however suggest that the failure of the company to meet a certain objective, the poor performance of management over a period of time or deterioration in the underlying commodity price would be some of the reasons which you could include here. For traders the exit rules can either be price bases (i.e. set your stop loss at a certain pre-determined level) or time based (i.e. if the stock does not start moving in line with my expectations by x date then I will reconsider the position and/or sell).

·         Information on managing the position for trades or investments that go in your favour. For example will you exit 100% of the position in one go or will you scale out of the position over time to ensure you do not sell at the highest nor lowest point. For my investments I plan to scale out of each position because it is simply too risky to take all the money off the table in one go (for positions that are going your way) as there is always the potential for another announcement or the strong buying to continue. This will obviously average out your potential gain/loss but I believe it is an important tool well worth considering.

·         Your thoughts on the riskiness of the position. All of mine investments are typically “high risk”, however I think it is important to detail this in writing as it will remind you of the pitfalls associated with each investment and remind you that even if the price is currently green there are still risks associated with each position. I would also be looking at detailing what risks you foresee in the share price and the company’s operations. This can also be linked in to your exit rules.

I am sure there are many others that I cannot think of off the top of my head so please feel free to comment below and share you thoughts.

The Benefits of a Trading Blog or Journal

As the year draws to a close I wanted to comment on the benefits I have received from running this blog over the last couple of months. I have found it an immensely rewarding experience and I am somewhat surprised at how easy it has been to keep coming up with new posts and information to share you with you all.

The first and most important benefit I have noticed is that having a public blog forces you to read and write about company announcements. Every time news comes out I make sure I read it in depth and consider its implications before I post an article. Yes, I am sure you already read company announcements, but writing about them takes your analysis to a whole different level.

Secondly, I have found the weekly updates to be very satisfying and help quantify my portfolios performance. A week goes so quick and sometimes it is hard to remember where the share price was a couple of days ago let alone 3 or 4 weeks back. By writing down the closing price each week I have become more “in tune” with each stocks performance and quantify what the impact of each announcement, market sentiment, etc has been.

Thirdly, it provides an important review tool. I have copious amounts of notes on all the stocks I have invested in and besides OBJ which I bought before starting this blog a lot of that information is shared on here. Instead of searching my computer it is sometimes easier for me to read through my old posts. Not only does this allow me to review information on each company but it provides an insight into what I was thinking at the time.

Finally, it has allowed me to connect with other traders and investors. I am normally on HotCopper, Aussie Stock Forums and ShareScene a number of times throughout the day, however, the blog has provided a different avenue of discussion. Some of my readers have posted stocks they would like me to check out, interesting links or just there comments. I appreciate all the feedback and it is good to know that people are taking the time to read by posts.

So if you are an investor or trader I would strongly recommend starting a blog. I think the fact that it is private creates a certain level of expectation which will ensure you keep posting and keep up to date on each of the stocks you own. If you start one let me know and I will share the link on my blog.

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”

Course One Complete!!!

The other week I posted a video entitled “Secrets to Success”. I have never been one to follow these self-help gurus, but the message that Eric Thomas preaches really resonates with me. In summary it is about taking the initiative and spending each day doing something productive.

His videos have really spurred me on and today I am proud to announce that I have completed my first mining course, An Introduction to Mining and Mineral Processing, through EduMine. Now unfortunately I don’t get a certificate or anything, because I didn’t pay the extra $140 odd dollars, but I completed in none-the-less and now have a greater understanding of some basic principles in mining and mine development. In fact I am so pumped I have already started another course!

Eric’s videos made me really think about how I am approaching these courses and where I am in my trading and personal life and I can really see that I have a small window of opportunity, right now, that I must grab. I have to throw everything I have into reaching that goal in order to achieve what I want to achieve (becoming a full time investor).

Obviously it will not be a straight forward process and I have already met my first minor challenging, balancing time with the family (wife) and the desire for further education. As a result I’m waking up earlier and jumping into work sooner. I know that every hour I finish my clients work earlier is another hour that I can spend studying.

Exciting times lay ahead and I look forward to keeping you all in the loop!

I didn’t Listen to My Own Advice

This is pretty embarrassing to admit after banging on about the importance of doing your own research and the forming your own opinion, however I have recently fallen into the trap myself.

I have been following a stock, Northern Star Resources (ASX: NST), for a while now and was considering taking a position. In my opinion it is a well-run company, that has managed to turn an unwanted mine into a good little cash cow. That said there are a number of risks that I have to consider including the fact that the mine life of their Paulsens project is unknown and their Ashburton Project is pretty much 100% refractory ore, which makes the recovery of gold harder.

Anyway, as I was saying, I was considering taking a position in the company but my research indicated that future growth could only be achieved through an increase in the gold price, a sustainable mine life at Paulsens or further acquisitions. I discussed my research with another poster and it was only now that I can see that I placed too much emphasis on that discussion. My opinion was swayed and I decided to cease researching the stock. At the time it was trading around 58 – 60 cents (which is where it is currently at), however a couple of weeks back it dropped to the low 40’s which would have been a prime buying opportunity had I kept on top of the game.

Furthermore NST has made some recent announcements which are very significant for their Paulsens project, with the potential to alter my valuation. In my mind as long as Paulsens continues to pump out the gold this company is going to be in a very strong position. So I have admitted my mistake and maybe I have missed the opportunity, but I am going to pull up my notes and do some further research. Who knows it may be part of the portfolio shortly, it may not.

As always please do your own research and consult a licenced financial advisor before making any investment decision.

The Benefits of "Do Your Own Research"

I admit it is hard to block out all the noise that we hear on a daily basis, media commentators, youtube videos, forum posters, blogs, everyone seems to be shouting some message and it always those who are the most controversial (whether bullish or bearish) who get the most air time.

When I was younger I used to get caught up in this, not because I didn’t do my own research but because I was second guessing myself or looking for confirmation from an external source. However, the fact remains that these “talking heads” do not necessarily know more than you do. They do not have a crystal ball. And if you apply yourself and spend the time to research a particular company or industry you too can become an “expert” in that field. When you are confident in your knowledge and ability you will not seek this external validation, your investment decisions will be clearer and you will sleep better at night.

So why am I writing this post today? Well for two reasons. Firstly I read two rubbish articles on the Sydney Morning Herald and News.com.au website today claiming that property prices were going to boom from now until 2013. Both articles referred to a BIS Shrapnel report, a report which I happen to have. Both of these articles correctly stating that BIS are anticipating growth up until 2013, however they then say that growth is expected to slow. This is incorrect. On page iii of the executive summary it says:

“However, the magnitude of price rises will be constrained by the spectre of rising interest rates, which are forecast to eventually peak and bring about a downturn in the market in 2013/2014”

A downturn is completely different to the “slowdown” that the major news sites claim will take place. A downturn implies prices will go down! A slowdown implies price growth will slow! Two completely different things! Any way the reason why I post this is to highlight that you must go to the source of the information to understand the true picture. Don’t just listen to the “talking heads” whether they are on the net or in a paper (and that includes me).

The second incident that led me to write this was some recent comments made by a “well respected poster” on a couple of forums. Now this person is intelligent and certainly understands the industry in question very well. As a result they do appear to hold “sway” over a number of posters who hang onto their every word. This same poster for whatever reason turned bearish and mentioned that they would be dumping shares in a particular company (yet the volume so far suggests otherwise). As a result of these statements a number of other posters suddenly got nervous and I thought I would take this as an opportunity to say that just because someone says something doesn’t mean they will actually do it. For all we know the person may be a net buyer and/or change their mind very quickly. Furthermore if you allowing your investment decisions and frame of mind to be swayed by someone else then it highlights a lack of belief in your own ability and research.

In summary, don’t look for confirmation from others, do your own research and you will be much better off for it.

Where I Am & Where I Want To Go

It can certainly get lonely working from home and trading the markets. Combine this with the fact that markets are currently getting smashed and the desire or will to make purchases is certainly reduced. However, this has provided me with time to reflect on where I am and where I want to go.

Firstly I want to say that I am happy with the stocks that I have incorporated into the portfolio and remain confident about their long term potential. This is not blind confidence, but is based on the research I have conducted into the company, the industry and potential financial return of their activities. I will be the first to admit that their share price performance has been dismal lately; however I must not forget the reason why I am investing in these stocks. I am not looking for 10, 20, 30 or even 50% gains. I am investing in companies which I believe have the potential to deliver 2, 3, 4, 500%+ returns and obviously it takes time to deliver on those goals and aspirations. Nothing has changed fundamentally for any of the companies in my portfolio, hence there is no reason to sell.

Sure I could have held off and purchased more stock at a lower price, but that is like saying I should have had a crystal ball. Everyone knows the global economy is not strong, but that did not stop us rallying off our GFC lows, nor would it stop the likes of OBJ signing an agreement that could potentially deliver millions in revenue.

So without much happening with the markets in the short term I have been given the opportunity to really think about what I am doing and where I want to be. And it is certainly right where I am at the moment; however I have realised the need to really apply myself and further strengthen my skill set. As a result I have been looking at online and short courses in the mining industry.  I basically want to understand everything there is to know about mining, geology and what makes these companies tick. Sure, I have a good general understanding at the moment and can decipher reports and conduct financial analysis into projects and companies. But I want to take it to the next level. I basically want to be able to talk to a Mining Engineer or industry veteran and be able to hold a technical conversation for an extended period of time.

This will obviously take time and money but it is something that I am interested in and if I am able to bolster my industry knowledge and combine that with my financial modelling then I feel that I will be able to research more companies, conduct additional analysis and be even more comfortable with the investment decisions I make.

Since I have started my search for some online courses I have come across a number of great options. But first up I would like to extend my thanks to Jamie from http://www.miningman.com/ who was kind enough to provide some online links and additional information. For anyone who is interested in the mining industry or project management I would recommend that you check Jamie’s site out. Jamie also provided me with a link to the “Smartminer” course which seems like a great option at a reasonable price. Through my own research I also came across infomine which has a section titled EduMine. I need to clarify their total costs but it appears as though you can gain access to over 120 courses covering a whole range of mining topics for as little as $40 per month, plus a small sign up fee. It certainly seems like good value and if you are based in the US or Canada you can pay an additional fee and received certification and continuing professional development points.

Anyway that is just where I am at the moment, committed to the blog, my investments and further education.

Paying For Blue Sky

When I first purchased MHM the market capitalisation was circa $120 million (undiluted). Since then the price has crashed from around $1.20 to as low as $0.52. It is clear that this fall is not only due to the global market selloff, but also the failure to deliver any material progress with MHM’s US operations. As a result that “blue sky” has been eroded over a period of time.

Even with some rough calculations which ignore the “blue sky” potential we could arrive at the following value:

MHM Australian Operations: $8.6m profit p.a. x PE of 5 = $43m *

Cash = $10m

Resource Ops/Exploration Potential = Say $25m**

Total Value = $78 million

* Please note the $8.6m projected profit is yet to be achieved from the Australian plant. I also only used a PE of 5 because no long term contracts are in place and additional feed will need to be sought after the 160,000 tonnes of Alcoa landfill is exhausted (5 years’ time).

** MHM has interests in Silica, Gold and Copper I have attributed a value of $25 million to these projects based on what other explorer’s trade for. If this was the sole focus of the business I expect that they would have a MC in excess of $20m but no higher than $30m.

As you can see from the above I can arrive at a rough valuation of $78m. This is $44m below the market cap at the time I purchased and hence represents the “blue sky” potential that I paid.

In hindsight I certainly should have waited for the gap between the company’s current operations value and the market cap to reduce, however, news on the US expansion was expected around the middle of the year and if it had announced a 200 – 250,000 tonne plant then $1.20 would be history in my opinion.

What this really shows is that as an investor I need to balance the risk/reward of paying for this “blue sky” potential or waiting for the price to drop and ultimately miss out on the bigger picture. I continue to maintain almost 50% of the portfolio in cash and it is my aim to increase my holdings in MHM after US expansion is approved. I anticipate that I will be able to do this under my initial purchase price of $1.20.