Strategies for Successful Buying or Selling

As I’m sure you have heard or experienced, the junior resource market is highly volatile. To protect yourself, there are a number of different ways to buy and sell positions for maximum gains. I have put together a few of the strategies that I have used to squeeze out as much profit as I can with the juniors.

Tranche Buying

Tranche – def: a portion of something.

Tranche buying is the dollar cost averaging of the stock of your choice. Typically, dollar cost averaging is used over a specific time period. The investor decides they are going to invest X amount of money in a company and buy its stock over a certain period of time. The buying price of the stock isn’t taken into account, and will vary across that given time period.

Tranche buying is similar, but all price dependent. The investor picks a total position size and buys a large percentage of that total position as a first tranche. Typically, a first tranche can range from 40% to 60% of the total position. The remaining tranches will make up the remaining position, the portion of each is up to the individual investor. For myself, if I’m using this tactic, I will buy in two or three tranches, with the first tranche making up 50% and the other two split 25%/25%.

Typical rules of thumb for deploying the second and third tranches: A second tranche is bought if the stock drops by 10 to 20% below the initial investment. A third tranche is bought if the stock drops below 30% of the initial investment. Also, it should be noted, you should always investigate why the stock is dropping; is it just the regular volatility of the market or is it bad news that can’t be beaten? Answering these questions will tell you if you should buy a tranche or possibly even sell your position.

In my experience, I didn’t do enough investigation into why the stock was falling, because I was so used to a bull market that averaging down my initial position was somewhat automatic. A great example of this is Exeter Resources (XRC); I bought the stock in early 2012, somewhere around $3.00. The stock rose to around $4.00 and then proceeded to fall back down below a dollar by early 2013. I bought twice along the way – it was like trying to catch a falling sword.

In retrospect, with Exeter, I was chasing a deposit that looked amazing above $1400 USD/oz Au, but fell apart once the despair and doubt of the bear market took over. For a number of reasons, I should have caught this earlier, but I didn’t. Lesson hopefully learned. As Howard Marks says in his book, The Most Important Thing Illuminated, we need to be second-level thinkers; what are the unanswered questions? Have they been answered? What do the answers mean?

A Simple Example of Tranche Buying:
Total position – $10,000 in Explore Corp
1st tranche – $5000 @$1.00/share
2nd tranche – $2500 @$0.90 to $0.80
3rd tranche – $2500 @$0.70 and below

NOTE: There are many speculators who will average up their position in a stock after answering questions that open up new avenues for the success of the company. Answering major questions that might persuade you to buy more at a higher price include:

– Good drill results that suggest there are more good things to come
– Better than expected feasibility study results…higher IRR%
– Political change, the de-regulation (these days, this rarely happens) of the mining industry

Free Ride

My first exposure to this rather simple concept was through Casey Research. They coined it taking a “Casey Free Ride,” because the initial investment amount is sold once the stock doubles, thus allowing you to take a free ride on the remaining portion of the stock that you own. For the junior companies, this is a great way to de-risk yourself as there are so many ways for a project to fail. By having your initial investment removed, you’re only playing with potential profit.
The downside to this strategy is that it significantly reduces the amount of upside potential the stock presents to you and it also increases the broker fees.

Full Position Buying

Depending on your risk appetite, this may be the most straightforward way to invest in the junior market. Personally, it’s the system I use the most these days. I find the best value for my risk appetite and deploy my full amount into that stock. The twist, however, is that if the stock price does fall and I’m ready to buy my next position, I will compare the value presented by each of the stocks in my portfolio to any new positions that I may be interested in buying – whatever presents the best value or buying opportunity is what I buy.
My most recent example of this is buying Lydian International (LYD). I bought my initial position in Lydian in the fall of 2014, just above $1.00. The stock dropped like a brick over the next year and found a resting place fluctuating between $0.20 and $0.30. Evaluating my portfolio this past spring and comparing it to the value in the market, I believed – and still believe – that Lydian poses remarkable value in a quickly rising market.

Margin Buying

Certainly the riskiest of the buying styles, the investor uses margin (or credit) to purchase more stock than they have actual money in their trading account. This allows for massive gains when you get it right, and massive holes when you don’t; major market fluctuations in such a small market, margin calls or outright company failures leave you very open to risk. This is not a buying strategy that should be taken lightly. I highly suggest that you speculate with money that you can afford to lose, but it’s your choice and fortune does favour the bold!

Private Placement Shares Becoming Free Trading

The primary source of cash for junior companies comes from private placements (PP). These PPs become free trading four months after issue. Investors in need of cash flow, especially after a run up in the stock, will therefore use this first opportunity to cash in their investment. You can play this a number of ways; firstly, you can short the stock in anticipation of the free trading shares, or you can think of it as a possible entry point and buy on the weakness, or both (Use SEDAR or SEDI to find this information).

Expiration of Warrants

Typically, warrants are issued during private placements. Warrants will always have an expiry date, and investors who have not exercised their warrants may rush to cash them out. Giving you the potential to enter the stock at a reduced price or the ability to short the stock in anticipation.

Forced Conversion of Warrants

Forced conversion of warrants isn’t a part of all private placement deals, but it can be. Reading the details of the deal can reveal this information and give you a leg up on the rest of the market. Forced conversion may be worded something like this, “if the stock price trades above a certain price for 20 trading days, the company has the right to force convert the warrants laid out in the PP.” Like the other PP related buying strategies, you can use this knowledge in a number of different ways (Use SEDAR or SEDI to find out this information).

Options or Insider Buying/Selling of Management or Consultants

Knowing when insider options are exercised or open market buying or selling is occurring is integral for understanding how much skin the company insiders have in the game. There’s an article I wrote which outlines this in more detail and explains how to keep track of insider buying and selling for your favourite stocks. Check it out. Invest Like an Insider

Until next time,

Brian