BULL MARKET BEER GOGGLES AND EXIT STRATEGIES
After reading GOLD-EAGLE on a regular basis, it is evident that for many the long accumulation process in precious metals stocks is starting to pay off handsomely. The returns on gold producers as a result of a rising price and/or corporate speculation have been impressive with percentage gains in the 100's. With any bull market, you are going to see periods of selling pressure where the early birds start taking some profits, and for some share prices finally reach their purchase price, and the "stale bulls" take it as a lesson and bail out.
The strong gold run from 1995-1996 more than likely saw many purchase stocks that with the benefit of hindsight were expensive. A number defected to the Dotcom bandwagon and increased in value, however many elected to remain focused on gold and kept plugging away in an environment of falling prices and dwindling investor sentiment.
Strong Run In Australian Gold Producers From 2001
The major and mid cap Australian gold producers have performed strongly since early 2001 and now the main focus is based on how the performances can be maintained after significant upside on a percentage basis has already been attained. Some out-performers include, (trading ranges are approximate)
- Croesus Mining (CRS) 35c to a recent high of 90c
- Lihir Gold (LHG) 60c to a $1.60
- Normandy (NDY) (prior to Newmont takeover) 90c to $2.20
- Newcrest (NCM) $3.80 to $8.20
- Troy Resources (TRY) 60c to $1.60
- Triako Resources (TKR) 45c to $1.40
- Kingsgate Consolidated (KCN) 70c to $2.70
These performances in some cases would have matched or bettered by US, South African and Canadian gold producers without the fanfare and razzmatazz of the NASDAQ boom. The press has only recently started to include stories on precious metals, and for many average investors they have missed out on the benefits associated with the early upside.
Where do the early birds go next?
This phase could well provide the next leg of activity in the gold bull. Those that have invested in producers could now be seeking moves down the ladder to hunt out explorers and emerging producers that could well take the ball up next. Whilst the virtues of "buy and hold" have been well documented, keeping capital flowing could also be another strategy that could greatly enhance the spectacular returns already attained.
A potential strategy
For example and investor purchased 50,000 shares in a small gold producer in 2001 taking a longer-term view. The shares were purchased at 30c, and recently the stock has performed well and finds itself at 90c and discussions on the Internet are suggesting targets in excess of $1.20. The $15,000 investment has grown to $45,000 and although the investor may see $1.20 as a logical target the percentage benefit of holding during the next leg is 33.33%. Gains similar to this will no doubt continue to wet the appetite of the investor, and when their stock suddenly stops for a breath they witness other smaller companies moving strongly. In order to capture the rise, they elect to sell half of the original investment, and are now a quality gold producer and the capital to look for other opportunities. The initial studies will concentrate on finding an emerging producer with similar fundamentals, however they are also inclined to look towards a speculative explorer that is about to drill a major target near an already producing gold mine.
Essentially the investor is selling an investment that everyone else wants to buy, although when he or she purchased it they were probably fairly lonely on the buy side. Increasing volumes and interest from new investors makes these exits far easier, where as selling during quiet periods could well involve having an open order for weeks before it was filled.
Where do the new investors go?
Those that have only recently become acquainted with the gold bull through the financial press will probably look towards the major producers regardless of the upside that has already been factored in. The mainstream press will rarely discuss an unloved junior explorer sitting quietly at 5c, but go for the larger companies and those with the brand name. So at this stage of the run it could well be the institutions and new investors sticking to the perceived safety of the major producers, whilst the more experienced are already accumulating the cheapies for the next phase in the hope of selling them to the less experienced during the ensuing hype and frenzy.
It is only a matter of time before other investments are given up on such as fallen tech darlings and those holding them cash in their chips in attempt to make up the losses.
Although the commodities associated with the boom are moving in price, the fact remains that the stocks associated with them (options) may initially outperform based on the sheer weight of investment demand as opposed to underlying fundamentals.
Why would you sell now?
Its amazing how when you buy a stock you perceive as being cheap you get asked, "Why did you ever buy that for?" and then when you go to take a hefty profit during market madness, you are then asked, "Why are you selling now, the market is rising?" In simple language that is worldwide and not by any means rocket science, the idea of the market is to buy low and sell high. You can only do this when you have willing participants on the other side of the transaction prepared to accept the risk. Experienced speculators accept the fact that it is ludicrous to attempt to pick absolute tops and bottoms, and by virtue of their experience they are able to quickly assess the merits of other stocks then jump on them when the vast majority are looking in the other direction.
Bull Market Beer Goggles
During bull markets there is a certainly a buzz in the air. Share prices are rising, there are opportunities to lash out on discretionary luxury items, and finally eating out is an affordable pastime. If these periods are so good, then why are the majority getting them so horribly wrong? Maybe they fail to remove the "bull market beer goggles" that make any overpriced stock or commodity look attractive and cheap. During this period ones personal finances are indestructible as letters from credit card providers keep flying in asking if you would like a top up. All of a sudden you start looking seriously at buying a luxury-depreciating asset (car), and while you're at you might as well upgrade the whitegoods and electrical appliances in the house.
They say that by consuming chocolate feelings of "euphoria" and "well-being" is provided by the release of anandamide, which has similar cellular receptors as THC, which is found in marijuana smoke. Are the affects of a bull market similar to mass chocolate consumption or pot smoking?
With all the lessons in history dating back to the Tulip Bulb Craze in the 1600's, more often than not they all end in tears. Sure some companies will get into production and move forward however with the majority they will simply ride the speculative wave then disappear into the abyss.
Whilst there are predictions of gold prices in the thousands and silver in the hundreds there is certainly no harm in keeping funds flowing, and moving into better opportunities when they present themselves.
Selling into the "beer goggle" brigade is certainly one way to walk away from this one with some capital appreciation as opposed to destruction. For each investor the time to walk away will be different, and this article could be dismissed as being far too early for many to even consider. There are always thoughts associated with "This boom could be my last opportunity", however as many experienced investors will suggest there are always opportunities in any market.
I would like to thank the writers at GOLD-EAGLE for providing information and an education to many that could well have missed the run to date if they were not directed to this marvellous site.
Tony Locantro
locantro@iinet.net.au
4 June 2002
Tony Locantro is a client advisor in Perth, Australia, and the author of "The Green Room", A Guide To Speculating on the Australian Stock Market. Tony was previously a major contributor to Australian Internet forums under the nick "Budfox" from 1998-2001.
Stocks mentioned in this article are for illustration purposes only and do not represent investment advice. The author has both direct and indirect interests in stocks mentioned in the article and these may change without notice.
Email this Article to a Friend 
Printer Friendly Version