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WEALTH DESTRUCTION AND TRANSFER
I must admit to enjoying the thrills associated with a fast moving market in a predominately northerly direction. The opportunity to make 30% in 30 minutes or having an overnight hold turn into a 2-3 bagger is an exhilarating feeling, and many would long for the absolute market madness that dominated the first 3 months of 2000 to make a comeback.

If bull markets are such wonderful events, why do they have a nasty habit of chewing up and spitting out investors one by one? I feel the answer lies in the money management principles adopted by investors (usually none) and of course the green-eyed monster that turns the majority into money hungry beasts. Along with the desire for money, high percentage returns and luxury items comes the need to become a pathological liar and replacing a number of character traits that tend to dominate during quiet markets. Like the transformation of "The Hulk" normal every day people simply change for the worse, and his or her anger only intensifies as the bear takes hold.

HISTORY LESSONS

All boom and busts are similar in nature, although their duration may vary from each significant event. For me personally as an advisor, the Nasdaq boom was a fluke, and most of our returns were clearly "off the side of the boot". A number of small gold and mining stocks I placed funds into, were quickly snapped up technology craving investors and the key ingredient in the boom "the daytrader". Companies, whose share prices were trawling along the bottom in the 3-5c range, were to transform into tech blue chips with share prices ranging from 30c to several dollars. Market capitalisations of $3m were no longer, and during the early months of 2000, companies with nothing more than a website and a dream were able to attain market capitalisations well in excess of $50m. These days some gold producers who are actually making money (raw books), and have resources in the ground are struggling to climb into double-digit market capitalisation territory let alone be assigned a reasonable valuation.

The Tulip Craze

  • 1620-1637.
  • Dutch people embraced beautiful tulips, and after mutation and a virus "mosaic" the petals of the tulips developed contrasting flame patterns.
  • Financial options derived on the tulip.
  • Value of tulips slide over 99% from their peak prices, and Holland was swept into depression.

The Roaring 20's

  • Jazz, real estate speculation and the new breed of wealthy American dominated the 1920's.
  • The ultimate low of the 1929 crash was not reached until 1932, and it took until 1954 for the market to recover. (In terms of the major market indices)

The Poseidon Nickel Boom

  • 1969-1970, and involved the discovery of nickel in the Windarra region.
  • In September 1969 the shares exploded from $1.85 to a high of $270 on January 10, 1970.

The Mid 1980's

  • Equity mania spread worldwide with significant gains in a vast array of sectors. (Speculative mining stocks exploded).
  • On October 19, 1987 (Black Monday), the DJIA fell 22.6% to 2246 to 1738.
  • The Australian gold index, which was at 4131.7 on September 22, 1987, was decimated by October 21, 1987 to 2415.9.

The Bre-X Scandal

  • Gold fever hit Canada after it was reported the Busang deposit had the potential to host 71 million ounces of gold.
  • After the reports there was a struggle to attain control of the deposit between major gold and resource companies.
  • Share priced breached $200 after trading as a penny dreadful. An elderly couple were featured on a television program clearing emphasising how they were caught up in the fever, and made a considerable fortune from trading in Bre-X shares. (They continued to believe that Busang was the "real deal").
  • Shares were suspended on March 22, 1997 after a newspaper article based on a Freeport study raised concerns at the size of the gold resource.
  • Alleged, "salting" of the assays and the mysterious death of the geologist Michael de Guzman.
  • Worldwide ramifications in terms of mining confidence and was instrumental in the creation of the JORC standard.

THE GREAT EQUITY BULL UNRAVELLED

It is now starting to emerge that the great bull market that began in the early 1980's was built on weak foundations, which included access to easy debt, and alarmingly dodgy accounting standards. Although the 1987 crash caused considerable damage (mainly in the speculative sectors), it could be viewed with the benefit of hindsight as a "bull market correction". Investors have been literally bombarded with the virtues of long-term investing, and how over time equities will easily out-perform all other asset classes. With the considerable advances of the Internet and Pay TV investors can now take hold of their investment destiny and punch through their own orders into the market. It was apparent that in Australia as the Nasdaq was on the verge of crumbling a major pricing war broke out between the discount brokers, as banks rushed to grab a slice of the emerging boom in on-line and low cost investing. The shift away from traditional full service brokers was in full swing and as a result many firms were forced to merge, scale back their operations or perish.

The analyst scandal that engulfed Merrill Lynch, along with doubts over a number of stock recommendations there has been a significant increase in the promotion of independent investment advice, however many will again ask the question, "Just how independent is the advice?" With analysts reputations blemished, it is now a case of "Whom do you in fact trust" for investment advice not tainted with corporate incentives and analysts placing recommendations on stocks they feel are "crap". Whilst dealing with a bear market for the majority that rely on mainstream investment products is an ordeal in itself, the lack of trust in the corporate world that now appears to spreading is certainly not what the doctor ordered.

GRIM STATISTICS

When investors become suspicious of brokers and analysts they tend to congregate together and exchange ideas that are either through the gossip grapevine or through independent financial newsletters. I have looked at a number of stocks in Australia in terms of the former tech darlings and more recently some companies that have slid into administration.

It could well provide an insight into how the current precious metals boom could unravel in its mature stages.

Stock 1: Mining Company (suspended)
From 01/01/2000 to 30/09/2001

Stock 2: Tech Stock (liquidation)
From 01/01/2000 to 31/12/2000

Stock 3: Tech Stock (currently trading)
From 01/01/2000 to 10/07/2002
Currently around 3c

THE TREND IN GOLD AND SILVER STOCKS

I have looked at the figures from two gold producers and a junior silver stock and the following statistics are interesting at this stage of the cycle.

Stock 1: Emerging Silver Producer
From 01/01/2000 to 10/07/2002
Currently trading at 14c

Stock 2: Gold Producer
From 01/01/2000 to 10/07/2002
Currently trading at $1.23

Stock 3: Gold Producer
From 01/01/2000 to 10/07/2002
Currently trading at 72c

FROM THE STATISTICS

  • Retail investors are attracted to stocks that have fallen considerably (catching falling knives). The figures would indicate that the risk of a 100% capital loss is often ignored.
  • Full service brokers and institutional investors tend to react more quickly to a change in sentiment and sell their holdings before further price decay.
  • It is often the retail investors that are left holding the bulk of the worthless script when a company goes into administration/liquidation.
  • Retail investors tend to dominate the lower priced stocks in terms of volumes. (Increased due to daytrading).
  • If the precious metals run is to continue it would appear that we are still in the infant stages of such an event.
  • The buying in gold and silver stocks could well be the "smart money", judging by those involved in the accumulation process. Larger brokers and institutions are building positions in low-priced stocks.
  • Mainstream investment in gold/silver is still negligible, although press attention is increasing steadily.
  • Market participants are still hopeful of a Nasdaq recovery, whilst the jury is still out in terms of gold/silver.

WILL THE NEXT BOOM BE ANY DIFFERENT?

Despite the revelations in the press over the decline of the Nasdaq, dodgy accounting practices and the fortunes won and lost, human behaviour tends to remain constant in any speculative boom and/or equity bull. There have been numerous examples of where stocks have risen to excessive levels and fallen from grace and despite lengthy debriefings the same mistakes of the past continue to be made on a regular basis.

The recent activity in gold/silver has increased the hopes of the precious metals bugs worldwide that the speculative juggernaut witnessed during the great Nasdaq boom will again re-emerge in their own backyard. Despite having share prices appreciate into the stratosphere many will inadvertently throw away their money management principles and may ultimately suffer both the psychological and financial consequences of their actions. Bull markets have the uncanny ability to create more bankrupts than they do millionaires.


Tony Locantro
locantro@iinet.net.au

16 July 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.

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