The Critical Eye Protects Your Money - part 2

So, we’ve had some time to digest the first part where I mentioned that in my view TA does not apply to investing, but only to trading. I’m not a trader, so I’ll leave the issue of TA for someone how enjoys talking about candles and heads and shoulders, timing , Fibonacci lines, Elliot waves and all that other stuff that is suppose to tell us what a stock is going to do based on market sentiment. Self fulfilling prophecy, I tell you.

Personally, I’ve searched far and wide, and have yet to find a stock that can actually read a chart or light a candle to find its way in the dark corridors of a Technical Analyst’s mind.

Thus ………Begone!, you architects of sentimental value and allow me to welcome the engineers of fundamental values.

In all honesty, I’m sure it works for some. I just can’t get my head around it enough to use it, because it is so limited and so inaccurate. For those who like to gamble, I guess it’s fine.

Back to the critical eye….. and questions. An enquiring mind is required to protect your money. I cannot stress enough how important it is to realize the value of a few things in the juniors market in mining specifically.

First thing to know is that MANAGEMENT is key. I say this because in the case of explorers, what are you throwing your money at?

Well, bottom line is…..you are hoping that by giving this company your money , they will be able to make you a lot more of it. When you put your money in a bank, you are getting a small return, but with a small risk. There is little risk that you will lose it all. First of all, there are guarantees, backed by gov’ts. In the juniors market, the only guarantee that there is, is that if you invest in a company that has less than stellar management, you will lose you money quicker than if you reduce your risk systematically by choosing the best possible team to do the work for you. How do you do that? Well, you start by asking yourself some questions and putting together a variety of issues that are important to reduce the risk. Remember the poker player……..the odds again.

Someone mentioned in a reply post after reading part 1 that you can make some decent returns even if you don’t choose the best 10 or 20 juniors. With timing, and with some luck……….point taken. Sure, that’s fine and true to a great extent. But………… What’s the secret to timing, and does it relate to making lots of money opposed to a little money? Timing is risky at best and not foolproof. The idea of nearing foolproof comes with reducing the risk and increasing the odds.

Thus, increasing the odds and reducing the risk, starting with management. What are we looking for? Well, I’m personally looking for the best. What is the best? Well, you can’t look into the future, but you can very easily use the past to give you a good idea of what the future may hold.

Let’s see now………there are some 1100 juniors in the industry on the TSX alone.

As we all know and as I mentioned before, there is a lack of talent in EVERY industry sector, so I’ll safely assume that in the junior market, this also applies.

1100 juniors. That’s at least 1100 geologists………..1100 CEO’s. Holy smokes! How the heck do you choose from those? Well, once again, I use process of elimination. Not always exact, but my goal here is to reduce the risk and increase my odds. I have to keep that in mind at all times. Not easy to do, so many opportunities, so much info out there touting all these companies. They all look so good……..oops, I’m getting all excited now. Back to the basics….reduce risk, increase my odds……..okay.

What do you do when you are looking to purchase a house? I hope that you make a list of those things that are absolutely important to you for your comfort and well-being. You also probably make a list of the things you don’t want. Apply this same thinking to choosing whether a management team is good enough for you to give them your money.

Let’s start with the CEO. I’ll let you in on a very limited sampling of the questions I ask myself of the CEO.

How long has he been involved in this sector and what is his background? Has he ever run a company like this before? Is he involved in more than one company in the sector? How many of those companies have achieved the level that you are looking for? Has he ever guided a company from exploring a property to a final buyout or JV or mine? Did he repeat that achievement and how many times? What did he do before getting into this sector? What is his geo experience if any, or is he a promoter, a deal maker? Has he ever been involved in any type of scandal? Has he ever been involved with insider trading? Has he ever been ousted from another company? What is his education? What is his personal financial situation? Is he married, has children? Does he buy common shares at market is just an options and warrants man? What is his total percentage of holdings in the company? Does he trade the company shares extensively? Does he exercise options only to sell the shares the next day or week? Does he actually have a plan to take the company to the level you believe is required? What is his personal long term outlook for the company? What are his views with reference to markets and short term traders?

There are another 25 or so that I ask myself on the CEO. Do an exercise…write some of your own down. Write down anything that may strike you as helpful in trying to understand who the man is and how successful he was, is and may continue to be. Or not. There isn’t a question too silly to find out who you are giving your hard-earned money to. Well, there may a few, but I’ll not be the judge of that.

Once you have written them all down, you put them in a spreadsheet and get answers to those you can, and as you move along in your dd, you can continue to add to the answers.

Some will ask……..but how long do you need to do this before you take a position. Well, if I like what you see in the first stages of my dd on the management and the properties…… I sometimes take a very minor position while I continue to do my dd, which sometimes can last up to the point where I actually sell off a position in its entirety. You see, the dd is an ongoing thing. It is my homework, my contribution to protecting my money. I have to know absolutely everything that is going on with the company that I can legally find out and that they can legally send out.

As you get more familiar with the company and the management team, you can add if you like what you see or get out if you find something that bothers you.

Now I move on to the financial team. Less important to me, but still a required parameter for certain growth stages of the company. I need to make sure that the financial director or CFO is clean and has never been involved in any hanky panky in the past. He has to have a totally clean history and preferably have been involved in the sector for a long time. ( I look for 10 years as a minimum.) You’ll find that financial types often trade in and out of their own stock…..at least I have noticed that in my years as an investor. I have 15 or so questions that I ask of this dept.

The Head Honcho in the field …….this is the important one for me, because without a geological team, there is no exploration, discovery or mining company. Good geos are scarce and never out of work. In huge demand right now. Does that mean that all the Geos in the 1100 companies are great? Nope, not on your life. All have the education, few have the great experience and even fewer are able to tell you from looking at the ground that you are standing on a resource. That last guy is the one I want to put my money on.

How many questions? I have 48 now………how many can you come up with? They include questions as important to me such as:

How many geologists are on your team? Where are they from and where have they worked? How many times has the chief geo or others on your team been involved or instrumental in a major find before? How was the chief Geo instrumental in bringing the find to a commercially viable stage? Where in the world has he been active? What majors has he worked with and in what capacity? 43-101 certified?

You are getting the idea by now I hope. When I think I have amassed enough information about a company and their management…then I haven’t yet done my job, because it is an ongoing task. Things change and information changes along with time, so I continuously add to the information and keep a large Excel file for each of my junior holdings, including all the initial questions and the answers to those, changing as the company moves forward towards achieving the business plan they set out.

Board members become victims of my questions as well and I scrutinize every appointment to see if I can understand why this person or another is getting on board with the company.

For example, today PEZ announced that Chester Millar was going to be joining their board. I asked myself why? After a few phone calls and a lot of searching, I understood exactly why and this made my comfort level with PEZ rise so I may be adding to my position soon. Certainly now that I noticed that it seemed very few people understood the fundamental yet very clear reasons for getting Millar on board.

The dd process is more difficult for me in this junior sector because there is less information available compared to holdings in POT or BRK. Large caps have much more published information, but they also have more limited potential, although POT returns have been rather more than generous in the last 5 years.

Each and every question you ask and answer should bring your risk factor down and increase your odds of finding the right company to match your comfort level, before you put your money in someone’s hands.

I’ll close this part 2 by reiterating that a juniors two most important assets are: 1. Management 2. Properties.

In part three, I’ll handle the properties and share what I look for. That part of the dd is the most fun because it entails questions that often send me to interesting and exotic places, shows a lot of history as well as a lesson in geography and politics. This part of the dd process is great exercise and adds to your database of knowledge, because it allows for comparisons later on. It also specifically indicates to me where I should and should not be getting involved, if I want the best odds for my money.

At this rate, I can see this becoming a 10 part essay. There is so much I would like to share, and I have to break it down into sections because I am not a writer and have no true understanding of how to put together a blog like this. It’s my first time writing a blog. I thought a blog was something you picked up with a napkin while holding your nose until last year.

I can't stress enough how clear it has become to me that the workings of the markets and the SP has become secondary to me after I found out how easy it is to reduce my risk and increase my odds with only a keyboard and a phone. Good management, coupled with good properties will ultimately get the SP you are looking for. It's that simple. The only problem is identifying them. You cannot do it without a system that allows for comparisons. And you cannot compare unless you approach the issue with some kind of set parameters.

There are patterns in the industry like any other. First you explore, then you discover, define and indicate. Then you get either bought out, set up a jv, or mine. That is the same all around. Achieving each stage takes time. A bull market in PM last a certain amount of time. You have to be able to find those who will make things happen within that given time frame. Of course, if you would rather spend time trading in and out, that's fine too. I would rather spend the time researching to be able to purchase what I believe to be the best, and then returning to my fishing, gardening, traveling and general leisure while the companies put into motion their business plans. This way I don't have to check things every day. I will already have built an exit strategy based on strict parameters.

I would though close this second part by mentioning that my willingness to share what I believe to be useful information with others was not one of my strong points until I met a fellow who has been doing this for some time now, and for no other reason than because I truly believe he loves to share and continue to add to his personal knowledge. He taught me that what I share will come back to me at some point, and I would become a better person for it.

Kevin Graham of GrahamAnalytics.com, has become a valued friend over the last year. We share many conversations about dd because we both enjoy doing the research. He even more so than I, and Kevin has much better writing abilities than I, as can be seen on his site. I urge you to visit and read his recent “Such stuff as dreams are made on”.

He has come up with an idea that will make all our lives a bit easier when it comes to doing dd. Watch for it in the next short while. I think he is ready to launch it soon.

Part three will be posted later this week, after I have managed to move everything back from the waterfront where the river is starting to swallow up a certain items of our landscaping, including my nice big sun deck, complete with fire-pit and my wife’s favorite rosebushes. I live in Quebec and the snow we had last winter is wreaking havoc with the rivers here. They are “rising to the occasion” as it were.

Cheers,

Vwig.

(Pls remember that the above view is my opinion and may not be shared by some. I welcome any feedback and hope that the above adds some value to your investing experience.)