Friday, December 28, 2012

2008: My Lesson from the Bull

I have told my 2008 tale of being trampled over by the bull to a person here and there, but with the bull once again making so many investors feel like road kill I suppose this is as good a time as any to write this post and forever offer hope to all who can benefit from my experience.

In short, gold is in a huge bull market and that means that timing mistakes, even colossal timing mistakes like the one I made in the late spring of 2008, will get corrected in the investor's favor. But as I will remind you repeatedly, one has to be patient.

Other than patience, the other *qualifier* to my optimistic promise is that one's investment does not include options, which expire, nor futures contracts which are subject to margin requirements and liquidation, nor thinly traded grey market securities that come and go with the wind, nor mining securities with make-believe balance sheets (no assets, lots of debt and lots of hype).

I'm talking about the financially sound mining companies and ETFs that fall precipitously in price due to the sometimes vicious market conditions that gold's bull calls its turf.

And now to my story.

In the late spring of 2008 I took a shine to a silver mining company - U.S. Silver Co. (USA.TO). The fundamentals for the company were appealing to me. It traded on the Toronto Exchange but was really an American miner operating exclusively in the State of Idaho and possessed great assets, management and lots of potential . The political risk of owning USA.TO was nil, something I was beginning to understand was a valid consideration when investing in a miner, and the company had no debt but lots of asset value.

U.S. Silver had done a remarkable job of not only attaining an impressively strong balance sheet in a short number of years following its start-up, but also appeared very close to achieving break even or positive earnings. I surmised that silver would appreciate strongly in the future and this miner should do really really well. And add to all this the fact that U.S. Silver was a small miner flying under the radar *undiscovered* and well, what else could a guy ask for?

My good friend and mentor Gary Savage advised me that this was the wrong time to buy a small cap miner - and probably a bad time to buy any miner, for that matter. Looking back now I absolutely appreciate what he understood at the time (the 2008 C-wave had topped just a couple of months earlier and the D-wave of an 8 year cycle low to follow would likely be vicious). 

But did I listen? Well, yes. Of course!

I listened just well enough to remember to this day that I did not take his advice, unfortunately.

So I bought U.S. Silver for right around $2.40 a share and just held on. As you can see from the chart below, silver rallied for a couple of months after my stock purchase but my miner just kept slipping. Near the end of these first two months the stock made a bolt northward - nearing my purchase price. Hey, I wasn't down too much at that point - so I stuck with my optimistic investment thesis and continued to hold.

Then from mid-August through early September 2008 all hell broke loose. Silver plummeted and so did my stock. A brief relief rally in late September gave me a draft of hope, but that teaser was immediately followed by another sky dive in share price that occurred with incredible velocity. 

By mid-November the share price on my *under the radar* *value worthy* investment had lost 93% of its value.

Click on any chart to ENLARGE
At that point, and considering that my investment had virtually become a total loss, I figured I had nothing to do but hold on and see what would happen next. 

Incredibly (for me at the time), I managed to sit still for another 6 months and continued to hold. By May of 2009 the price of U.S. Silver was starting to zoom higher and I took that as my signal to finally exit at around $1.20 per share. I realized a staggering loss of 50% on the year-long position while consoling myself that I could have done worse - much worse. And as you will see on the following chart that exit was pretty good timing as the stock thereafter went back to sleep for another 15 months. 

The lesson I had not yet learned - and that is now forever burned into my conscience - is that gold's secular bull will entirely correct one's timing mistakes - no matter how poorly timed - if one is patient. I settled for a 50% loss not believing this truth. The next chart will reveal that I could have instead received a nearly 100% gain - if I had been patient.

From the disheartening low of 15 cents in November 2008 U.S. Silver screamed 2766% higher - reaching $4.15 by November 2010.

My investment thesis that U.S. Silver was a sound company fundamentally, flying under the analysts radar and therefore temporarily undervalued by the market was proven true, just not on my timetable. 

The lesson I learned from the bull was to be patient. It's great when I am on top of my trading game and executing in sync with the bull's timetable. That is my ideal situation. I absolutely love the challenges of trading in real-time and like to think that, for the most part, I am pretty good at it.

But for times like now, when my positions are all entirely under water and I have obviously not stayed in sync with the bull, the best thing I can do is be patient

Honestly, I do not consider selling any position I have now at a loss. I just will not do it. The bull has taught me the lesson about its promise to correct my timing mistakes if I am patient, and I'd like to think I finally learned the lesson very very well.

I hope my thoughts will help you make good trading decisions that, with patience, will always be profitable!


  1. Another series of great posts, John. Thanks much. I think people find it hard to be patient because they fear they have bought the top of the bull - that a new bear has begun. I understand the fear. The opinions of the small guys that gold must go up because of inflating the dollar supply matters not. It is what the big money wants to invest in that matters. I too believe that gold and miners should continue rising until there is another blow-off top, but I just hope the big money believes the miners and gold are worthwhile too!

    1. Joe - for my part, I sensed that some of the best and brightest minds were
      over analysing the situation and themselves becoming confused. With that in
      mind I enjoyed working on the Excel spreadsheet data (ABCD and IC data) to
      determine, at least to satisfy my own curiosity, how the secular bull parabola
      structure was morphing as it grew, to determine consistencies(and otherwise)
      in its behavior, and to determine which data relationships offered a glimmer
      of predictive value.

      The Fibonnaci relationships were most apparent not with the behavior of price
      but with the behavior of time. However, I suspect strongly that the particular
      price data I used (absolute intra-day low and high for the respective pivots
      of both the ABCD waves and ICs), though the absolutely correct way to define
      these things, would not yield the harvest of Fibonnaci price relationships that
      one would find using the closing price as the pivot location on either the
      beginning or conclucion of the measurement. My observation is that price will
      stray well past a particular Fibonacci metric - kind of in the middle of 'no where
      in particular' - then find itself clinging to a Fibonacci metric at the close.
      My sense is that traders are emboldened to push price back toward some perceived
      'safe haven' of a Fibonacci-related price point. I guess that could be the subject
      of another study, right?

      The data that shook out of the 32 intermediate cycles may have some predictive value.
      It shows a clear pattern ABCD structures in which the A and B-waves are balanced in
      length with the D-waves and the number of intermediate cycles within each C-wave
      is consistently increasing and appears to be the bull's preferred method for catapulting
      price higher and faster over time.

      These observations are obvious and we have documented the evidence. But still, a single
      question in my mind remains unanswerable and, save for now, I have written about this.
      I picture 10 ABCD structures that began at $255 and peaked at $1923.7 as a single upleg
      of the ultimate parabola. What appears to have taken shape since that all-time high is
      the development of a pennant consolidation continuation pattern. If true, then the general
      price location of where we are today is 50% measurement (above $255) of where we are going
      in the future. And what I find unanswerable, without further study anyway, is whether the
      move out of the pennant will be as the initial upleg began or as the initial upleg was
      concluding (2001 vs. 2011).

  2. Hopefully this logic will steer Claude Res. onside

  3. Anon - you have offered a timely comment as I am just about
    to write another post about purchasing more CGR earlier this
    morning. Sometimes I think my readers can read my mind, I swear.

  4. John, What are your voews on GPL ? I have been sitting on that stock from quite some time but some reason its not able to break out $2

  5. Anon - I just gave GPL a quick look over and it looks fine.
    The fact that every single share that has been bought during the
    past 2 years can only be sold for a loss today is not helping.
    But we begin a new year after today and all those folks selling
    GPL against taking gains elsewhere for tax purposes will be all done.

    I sincerely think that in fewer that 3 years GPL will be priced hundreds
    of percent higher than it is today. Unless it is tying up money that
    you otherwise need now, my advice is just to just keep an eye on the
    company that they don't shoot you in the foot with a really dumb move,
    but just forget watching the day to day drama. I think you own a great
    company and are going to make out like a bandit, if you are patient.

  6. John,
    What about leveraged ETFs such as AGQ and NUGT? I have heard about time decay. When does it become an issue? 6 mos. 1 year? 2 years?
    Thank you!

  7. A - I really do not know the answer to your question, but I do know just enough
    to think you are expressing a valid concern. I have looked at charts of 2X and 3X
    ETFs over longer periods of time - like 2 years+ - and they really seem whacky.
    for example, I am looking at TZA - the 3X small cap BEAR ETF. 2.5 years ago it was
    $125 and today only $12. Did the small cap stock really rise so much in this time
    period that TZA should have fallen by 90%? I don't think so. And meanwhile, TZA's
    brother, named TNA, the 3X small cap BULL ETF has risen from $35 to $70 in the same
    time period. Yes, a 100% gain is similar to a 90% loss, but still, this just looks
    whacky. No doubt there are many great resources on the Internet that explain both how
    these ETFs are constructed and therefore why they do not exactly perform as one might