There are few sectors in the global market where passive investors are able to sustain high earnings in the current market. Among the most alluring opportunities are emerging market property and mining equities (i.e. exposure to commodities through mining). In the commodity market, one is exposed to substantial volatility; a dangerous exposure for the untrained when you are managing leveraged exposures. We argue that you don’t need to expose yourself to volatility or leverage in order to achieve high yields or asset growth. We will argue that in the mining sector, its not our capacity to take risks that differentiates yourself as an investor, its your capacity to conceptualise (and plausibly to quantify) the risks that will differentiate yourself from other investors.
Warren Buffet consistently makes huge returns for his investors. He does so by making use of others money, and by making ‘sure bets’. The consistency of his investment performance lies in the systematic nature or discipline of his investment strategy. Unless you have access to such leverage, then you are unlikely to achieve the consistent yields that he is able to generate; and without the leverage it will not be so lucrative. No bank will give you the chance. Our alternative strategy is to differentiate yourself in terms of knowledge rather than leverage. We outline a strategy for non-leveraged high returns. The reason why these investments are so lucrative is because few investors take the opportunity to develop their intellect to the point where they are able to appreciate these opportunities, so they don’t take the opportunity. The same is true for fund managers. Fund managers are mostly accountants; and their criteria for investment serve them, not you. They cannot invest in small companies that you can, because they have much larger pools of funds to administer. You are therefore compromising your interests by investing with them.
Most investors find investment overwhelming and associate it with a great deal of apprehension. This is an entirely negative perspective of finance that we want to address. Making money should be a source of efficacy and pride. The reason people find it overwhelming is because they have not had sufficient or systematic exposure to the topic. This is indeed very tragic because the implication is that there are a great many people who are allowing their lives to be motivated by fear. Worse still is that they are enabling others to use fear to solicit certain outcomes. They sanction politicians to placate their fears; they pay commissions to fund managers and their associated ‘sales spruikers’ to placate their fears. The contemporary wisdom of fund managers, affirmed by academics who have never traded investments, is that risk needs to be avoided through diversification. This is their modus operandi. We accept that risks exist; but these people convey that you should accept this as a ‘passive’ or inevitability of investment. We reject this because it denies you any control over your funds; as well as denying yourself the ultimate value proposition from investing; a sense of personal efficacy beyond your career. Modern Portfolio Theory was employed by the fund management industry as a rationalisation to encourage investors to ‘avoid knowable’ risks so that they could accept exposure to systematic risk by placing their money with them. They do not deny that there are systematic risks; they simply argue that those risks will be overshadowed by long term returns if you invest for 40-50 years. This is a rationalisation of course which serves their interests. Meanwhile investors are paying the opportunity cost of exceptional returns that exist because they have discouraged investors from seeking ‘specialised knowledge’ which would allow themselves to differentiate themselves from others.
The paradox is that the opportunity for exceptional returns in the mining sector exists because of the popularity of their approach to investors; and because of the governments ‘boom-bust’ paradigm of stimulating markets to a point where there is a ‘yield cliff’ followed by a ‘fiscal cliff’. These systematic risks result in the greatest transfer of assets that you will ever see. How do you explain commodity prices quadrupling in a matter of years? What lack of planning or market distortion precipitates that; only to be matched by a corresponding market collapse. These are the types of risks that need to be understood.
You might want to question where you place your hard-earned cash given that we are just about to enter another stage in the global commodity cycle; during which there will be a huge expansion in mining ‘volumes’ rather than ‘prices’. We are about to experience an unprecedented expansion of industrialisation on the basis of 20-years of low inflation (i.e. low wage demands) and high employment uptake in emerging markets. Talk of a fiscal cliff and high debt levels will quickly evaporate, and the focus will be upon global harmonisation and integration. There are no better markets to buy mining stocks than Australia and Canada. Investors will find it much easier to set up a bank account in Australia rather than Canada. I have been investing in speculative mineral resource stocks for over 30 years, and in my latest book ‘Global Mining Investment‘ (link) I reveal all the pertinent factors you need to consider when buying mineral resource stocks.
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