Analyzing a Basket of Miners

This is the sequel which I promised readers following my previous piece, “The Bullion Bulls Basket”. Before I get further into this, I want to remind readers that this is not an exercise in pointing readers toward particular companies, but rather in teaching/explaining to readers how to select and invest in these companies on their own.

As I pointed out in the first commentary, we have been left with little choice when it comes to handling our investments. First, the vast majority of financial advisors demonstrated (via the Crash of '08) that they were utterly clueless as to the level of vulnerability they had created for their clients.

Following that ugly episode, these “experts” (on a near-unanimous basis) pronounced that “buy and hold is dead” – this being the strategy which they had consistently recommended to these same clients in previous years.  As I also observed, warning their own clients that they could no longer trust the investments which these experts chose for them (over any length of time) is nothing less than an admission of their own incompetence. Telling an investor to “buy something”, and then whispering in his ear “…but don't hold it for too long” is not financial advice which inspires confidence.

Having thus been forced to take responsibility for our own investments, the obvious question to ask is “how can we possibly justify paying trading commissions to these incompetent middle-men?” For those who are unable to come up with a good answer to that question, we offer investors guidance in becoming their own “financial advisor”.

The hypothetical, five-company “basket” of miners which the three members of our “team” each selected for the original piece is obviously not meant to be a comprehensive strategy in itself. Five companies is simply not a large enough number to provide the optimal degree of balance and diversity. Added to that equation is our own individuality: we all have different investment parameters and different levels of tolerance for risk.

Thus, we chose our example-baskets to start the thinking process for readers/investors, rather than attempting to do their thinking for them. What could you add to those “baskets” to make them more balanced/diversified? What would you change in those baskets, to make them more suitable for your own portfolio? My most important objective in the original piece was simply to get people to start to look at these companies.

This installment is dedicated to arming investors with the right questions to ask, as they examine individual companies as potential investments in accumulating their own baskets. However, before getting into specifics, those pondering self-investing must always adhere to ‘The Golden Rule' for all would-be investors: know thy self.

An investor can spend dozens (hundreds?) of hours pouring over these companies, and construct a “perfect” basket of miners for himself – and still end up self-destructing. Deciding on the appropriate level of risk (and stock-selection) for one's portfolio is not merely a function of age, income, and long-term investment strategy. Equally important in that “mix” is being honest about one's own psychology.

Deciding that an “aggressive strategy” which incorporated a “moderate level of risk” is most suitable for your own portfolio is not an advisable plan if you are not able to cope with the high degree of volatility which such a strategy implies. Specifically, those investors who take on a level of risk which is higher than what they can be comfortable with are (by far) the most likely investors to self-destruct. They are more likely to dump their stocks in a “panic”, and also more likely to “chase” stocks when the market surges.

We all know that we are supposed to “buy low” and “sell high”. However, investors who take on too much risk always end up being ruled by their emotions, and a century of market history shows us that “emotional investors” spend most of their time buying high and selling low. Thus, first we must pick an overall strategy which suits our personalities, then we adopt a particular “plan” to fit that general strategy into our individual financial parameters, and then (finally) we can start to select the right companies to execute that plan.

Once investors reach that stage, here are some of the key criteria/questions which they should be examining as they evaluate these mining companies – and create a “diversified” basket of miners.