11 reasons why I love junior resource stocks

Junior resource stocks are companies that explore and develop mineral/metal resources. Junior resource companies do one or more of the following activities: They get a property, explore for a particular metal, and then (if they find something worthwhile) they develop the mineral resource into a mine that generates cash flow.

Here are 11 reasons why I love junior resource stocks.

1. IT’S HIGHLY ENTREPRENEURIAL

The junior resource industry is highly entrepreneurial with a lot of businesses starting all the time. All that is required is a promising property and you can pretty much set up a junior resource company. That doesn’t mean people are going to invest in it, of course, but it does create some really exciting buzz that I absolutely love about the industry.

(Naysayers will point out that the highly entrepreneurial nature of the industry increases the risk of scammy companies that are bad investments. This is true. But it is also usually resolved when investors do their due diligence. In my opinion, the advantages outweigh the disadvantages.)

2. IT’S EASY FOR INVESTORS TO GET INVOLVED

While there are resource stocks that have very high stock prices, many — perhaps most — resource companies are “juniors”. That is, they are small companies with penny stock prices. This allows investors to get in at a low price, spending just a few hundred dollars to get a few thousand shares.

(Yeah, there’s a downside here, too: Penny stocks don’t have far to go to fall to zero. So if you’re going to invest, make sure you can afford to lose your money. In my opinion, a few hundred bucks isn’t a big deal to lose. I’m not putting my life savings in one penny stock!)

3. THERE ARE RISKS

There are risks to any junior resource stock: The underlying commodity might suddenly bottom out. Investor sentiment might turn away from the commodity or the company or the region they are operating in. Political risk is always present — in third world countries, you might end up with a crackpot dictator who takes over the mine; in first world countries, you often end up with excessive regulatory obstacles. I like all of these risks! They pose a challenge for the junior resource company and for investors. Smart companies need to figure out how to overcome those risks as much as possible; smart investors need to figure out ways to mitigate against those risks through their investing.

4. THE POTENTIAL IS THERE FOR BIG WINS

If you buy a blue chip stock, the possibility exists that the stock might go up. But the moves aren’t huge. It might climb slowly, advancing a small percentage each day when it does go up. These stocks are famously stable. But in a junior resource stock, stocks worth pennies can increase at a greater rate — going up by a significant percentage when they do rise.

5. YOU CAN LIMIT YOUR LOSSES

Stocks fall, too. And people who want safety and security in their stock investments will choose blue chip stocks because they aren’t likely to fall as much. But just as junior resource stocks can climb dramatically, they can also fall dramatically, too. However, since they have a low buy-in, you are only going to lose as much as you invest. So if you invest only as much as you can afford to lose then your losses are limited.

6. THE LAW OF SUPPLY AND DEMAND ALWAYS WINS

The market is the jungle and the strong survive while the weak perish. What influences strength and weakness is the fundamental rule of the markets: Supply and demand. The more you understand supply and demand, the better you’ll do in junior resource stocks. Supply relates to how much of the commodity is being readily mined and stockpiled; demand relates to how the commodity is being used. Increases in supply feed demand and drive the commodity prices down, which makes it less viable for a junior resource stock to operate; Increases in demand eat supply and drive the commodity prices up, which makes it more viable for a junior resource stock to operate.

7. EVERYONE NEEDS MINERALS

In general, the demand for minerals is there so a well-chosen junior resource company that is focusing on a specific in-demand mineral has the potential to do well. Minerals aren’t going out of style. Yes, specific minerals might rise or fall in price because of supply and demand but minerals as a whole will always be needed. It is the responsibility of the investor to figure out what minerals will be in demand and to invest accordingly.

8. I UNDERSTAND IT

There are many penny stocks out there, not just junior resource stocks. There are tech and biotech and greentech, for example. The problem is, I don’t understand them. I’ve spent some time studying the resource industry and junior resource stocks in general so I’m comfortable working in this industry.

9. SUCCESS COMES FROM DUE DILIGENCE

I love due diligence. I love to roll up my sleeves and research companies to find out what makes them tick. It’s not easy and other people don’t like doing it, which is probably why I like doing it all the more. Here’s a blog post I wrote about how to do due diligence on a junior resource company. While you can’t eliminate all risks with due diligence, you can identify many of them and that allows you to deal with them as much as possible. The other risks (the ones you can’t mitigate) are just part of the fun.

10. THERE IS AN OPPORTUNITY TO SPECIALIZE

Junior resource stocks are basically their own category but within that category are sub-categories: You might specialize by mineral type (gold, silver, graphite, etc.), geographic location of mines (South America, Africa, etc.), where in the mine lifecycle a company operates (explorer, developer, etc.). By identifying a few specializations, investors will feel far more comfortable navigating the complex supply/demand equation because they are more familiar with a specific mineral.

Of course that doesn’t mean you don’t invest in other sub-categories, but a specialization helps you to focus bit.

11. THERE ARE MANY PATHS TO SUCCESS

I also love junior resource stocks because they have many opportunities for success, which (in turn) impacts the stock price. The most basic path to success for a junior resource stock is to find a resource and mine it, eventually earning cash flow from the production of the mineral. But that’s not the only way they can succeed. They can be a prospect generator, finding resource deposits and partnering with others who will bring those deposits to production; they can do a joint venture with a company to bring the deposit into production (which is similar to the prospect generator method but maybe with a bit more control over the process and skin in the game); they can sell the project to another company (we’re seeing a lot of this in the industry right now); they can be acquired by a major producer; they can split the company into multiple companies (which happened recently to one of my holdings — I know own three very good companies instead of one). There are even other creative ways to succeed as well — I just heard of one company that not only mines its own products but it also owns a mill that mills ore for nearby mines as well.

 
There are risks to junior resource companies and you should never trade these stocks if you aren’t comfortable with the risks. It’s not for everyone but I love the challenge, the opportunity, and the edge-of-the-seat excitement that comes with this kind of trading.

A rant about business plans: When was the last time you looked at yours?

When was the last time you looked at your business plan? Last week? Last year? Last decade? The day before you officially opened for business?

In my experience, surprisingly few people write a business plan (I made exactly that mistake!); and those that do, write it and then let it grow dusty on the shelf, as if the plan was just a small and annoying step that needed to be checked off of the list. I’ve met many people who spent more time fretting over a new car purchase than the start of their business. They don’t mind pouring over vehicular statistics and comparing models of the car they’re going to drive (which will immediately depreciate as soon as they drive off the lot) but they’ll cringe at the thought of writing some ideas, strategies, and financials down to give a little proactive thought to an investment of their time, money and effort that should appreciate over the years. Heaven forbid that they do a little business planning now to figure out the trajectory of their company for the years to come!

I think part of the problem is the we we perceive business plans. They are often thought to be stuffy, formal documents. They are thought to overflow with buzzwords that would make any MBA drool. Their numbers are said to be nearly meaningless. In many ways, these documents need to be written at the worst possible time — usually the point when the aspiring entrepreneur feels the most passionate and energetic about their business and they just want to get out there and take action… they don’t want to get bogged down in research and details and buzzwords and proformas. Business plans are perceived to be soul-crushing documents that are purely optional and typically only written by the anal retentive and extremely cautious.

But good business plans aren’t like that. They shouldn’t be stuffy or stuffed with buzzwords. A good business plan doesn’t have to be arduous to create and highly formal in how it’s structured and written. A good business plan shouldn’t crush your eager-to-start spirit — it should stoke the coals of your imagination and motivation by sharpening your focus. (Mixed metaphor alert).

A good business plan is meant to be used, not stored on a shelf. A good business plan should be both strategic and tactical, and something that a business owner can refer to every single day. Yes, a business plan is a high level document that you might use for banks or investors but it should also contain your operational plan, your sales funnel (your marketing and sales plan), and contingencies for when things go horribly wrong. It should inspire and guide… EVERY TIME YOU LOOK AT IT.

Heck, don’t even bother getting a professional to write it (unless you are going to use it to help you find investors). Just sit down and do it yourself. Roll up your sleeves and dig in. Write your goals and then the steps you want to take to get there. Create financial statement projects and proformas that are useful for you. (Tip: Create 3 versions of each financial statement — a set of high projections, a set of medium projects, and a set of low projections). Research. Add information based on what you’ve seen so far (if you’ve been working in the industry already). Create a document that you can hand off to someone else while you go away for a year-long vacation and when you get back, they’ll have built the exact business you had dreamed of!

Starting and running a business is like going on a long journey — it’s best accomplished when you have a map that you can refer to, which will help you get to your destination.

Like a map for a long journey, it’s not something you should write once and put away. It’s something that you should leave open on the seat beside you while you drive. When you’re not sure where to go, you can consult your map. When you’re tempted to veer away and chase new ideas, you can be reminded of the original plan. When you are forced to take an unexpected detour, you can get back on track. THAT is the value of a business plan.

If you haven’t looked at your business plan in weeks, months, or years, go get it right now. (Do you know where it is?) Dust it off and look it. Is it practical? (Probably not since you haven’t looked at it in so long). So figure out what you can do to make it practical. My suggestions are:

  • Erase the buzzword-filled nonsense that doesn’t help anyone. Replace it with some unpolished ideas in raw form — specifically, big-picture goals, smaller-picture goals, and the actions you’ll take to get there.
  • Write about how you want your business to grow, what you plan to do to get it there, and what you’ll need to scale up along the way.
  • Create financial projections that actually mean something by doing a bit of research and writing 3 sets of financial statements, with high-priced assumptions, medium-priced assumptions, and low-priced assumptins.
  • Add an operational plan.
  • Add your sales funnel (a marketing plan and a sales plan).
  • Add in your document templates, logo variations, branding rules, operational checklists, etc.
  • List contingencies and plans to implement them if the need arises.

If you have never created a business plan, do it now. Here are a couple of good sites to start with. These sites contain a mix of information, step-by-step instructions, and even templates to get you started.

Go and make your business plan useful to you!

One of the biggest mistakes people make when setting goals

Don't make this mistake when goalsettingI love to set goals.

I’ve been that way for my entire life.

Whether or not I actually reach those goals is another story, although I’m always being reminded of the importance of acting on your goals (which is why I write stuff like the Massive Action Checklist and Are You An Action Figure?).

I’m okay with setting more goals than I achieve (well, to a degree) because I figure that I still accomplish a lot in spite of hitting only a fraction of the goals I set.

But in the last year or so I’ve started to notice something else and it could be the key to unlocking a better level of achievement in my goals. I’ve also learned that other people face the same challenge too. (Whew!) In fact, my friend Warren Wooden of PLR Internet Marketing mentioned this very same thing in the recent interview I did with him for the third anniversary of his business.

Here’s the mistake most people (including me and Warren) make when goal setting:

Goals of varying timeframes are set but they don’t tie together.

You might set daily and weekly and monthly and quarterly and yearly goals… but the goals you work on for your daily goals might not contribute to your weekly goals, and the goals you work on for your monthly goals might not work on for your quarterly goals.

So instead of focusing on just a few projects, you end up spreading yourself too thin. You work for a bit on project X goals to meet your daily goals and then you work for a bit on project Y goals to meet your weekly goals and then your project Z goals to meet your monthly goals. Working on one goal will not contribute to a larger goal.

It sucks because you increase your workload, spread your focus dangerously thin, decrease your productivity, and then fail to achieve more goals.

HERE’S HOW YOU SHOULD SET GOALS

Start at the high level and work backwards: Set some big-ass goals — perhaps goals for your professional life (for example). Let’s say that you create a series goals for your career and you expect your professional life to last the next 30 years at which point you plan to retire.

Now you can break these goals down into three 10-year goals. But it’s important to note this: Instead of creating new goals, just create smaller versions of that over-arching goal. For example, maybe you want to retire with an annual passive cash flow of a million dollars in thirty years. So you divide that into three 10-year goals. Maybe you have the goal of earning a $333,000 annual passive cash flow by the end of the first decade and $666,000 annual passive by the end of the second decade. Whatever. These are just examples.

Okay, now that you have those 10 years goals hammered out, make them smaller. Again, don’t create new goals. Instead, create smaller versions of these goals. So your first decade of working toward an annual passive cash flow of $333,000 might mean trying to add $33,000 each year for the next 10 years — $33,000 in the first year, $66,000 in the second year and so on.

Now that you have annual goals created, then divide those goals by 4 to get quarterly goals. Now you’re trying to add $8250 per quarter in passive income.

Those same goals can be subdivided further — divide them by 3 to get monthly goals each quarter, then divide by 4 to get weekly goals, then divide by 7 (to get daily goals for a 7-day week) or 5 (go get daily goals for a 5-day week). Heck, there’s no reason that you shouldn’t divide your goals by 8 to get hourly goals based on an 8-hour work day.

Now you have real goals to work with… goals that will build on each other over time. Goals at the microscopic level that, if you work on them, you’ll contribute to your larger goals.

THREE NOTES TO CLARIFY

Goals are not actions. Dividing these goals down to that tiny level won’t make them magically come to fruition. Rather, it turns a seemingly overwhelming career-long goal into something that you can actually work on right this minute. So once you have these goals, assign actions to them. Some actions will be daily, some weekly , some quarterly, etc. But assign actions to contribute to those goals.

Not all goals work on the same timeline. I used passive cash flow as my example because I wanted to use some numbers that could be divided from large career-long numbers down to much smaller numbers. But not all goals will work that way. Some won’t take your entire career. Some can’t be divided down into hourly goals. Owning a Lamborghini in a decade is a worthwhile goal (especially if you cruise by my house and we can drive around in it for a bit). But it’s hard to subdivide a Lambo into annual, quarterly, monthly, weekly, and daily goals. (Well, not if you’ve heard Johnny Cash’s song “One Piece At a Time“). So use some common sense here, people. Figure out how to make it work. Maybe you set a goal to have enough money to buy a Lamborghini — that can be divided down.

Not all numbers are easily divisible. I hope what I’m about to write makes sense. Here goes: Not all numbers can be easily divided by the number of time periods in the smaller sub-set. Sometimes, you can’t just quickly divide your decade goal by 10 to get annual goals because the goals build on each other to create an exponential increase rather than a straight line increase. (Similar in concept to the different ways that depreciation is calculated — straight line or declining balance). It might be easier to make a larger jump later in the goal than earlier.

 
Image credit: TALUDA

Yes, you CAN time the market (just not in the way you want)

You can't time the marketTiming the market is the most ridiculous idea out there. (Well, maybe not the MOST ridiculous idea out there but it’s pretty out there and it’s pretty pervasive so maybe it’s high up on the list).

The thinking behind timing the stock market goes something like this: “Oooh! I want to buy that stock. But the price is too high right now. Maybe I’ll wait until the price goes down.

And then when the price does go down, the thinking changes to: “Ouch! I want to buy that stock. But the price is low and what happens if I buy it and it goes lower?

This is true for real estate, too. A potential homebuyer might say: “Whoa! Houses are too expensive right now. I’m going to wait until home prices come down a bit before I buy.

But when the sellers market becomes a buyers market, the potential homebuyer now says: “Yikes! House prices seem to be declining. What if I buy and the house declines even further in value?

I hear this line of thinking OVER AND OVER AND OVER AND OVER. I heard it when I was a stockbroker and I hear it today in my work with financial and real estate professionals. I’ve tried to talk people out of this thinking but it can’t be done. (And the truth is, sometimes I fall into the trap, too!)

Like some optical illusion, the price of a stock or a property is never perfect right now and investors believe that by waiting, they can buy it at a “better” time.

Unfortunately, there never is a better time. EVERY price point has its advantages and disadvantages. Unfortunately, investors only see the disadvantages to buying now (regardless of price point) and the advantages of buying later (regardless of price point)… and they don’t seem to remember what they said only a few months ago when the price was different.

And waiting for a market bottom or market top is impossible because it takes months of data from indicators (including lagging indicators which come after the event) to prove a market peak or valley.

Timing the market is a fools game because investors and homebuyers are always looking for the perfect price point (even though they often can’t identify what that price point is and, even when they do, they fail to act when the price reaches that point).

Timing the market is ridiculous idea and a fools game… but it’s not impossible. You just have to rethink what you mean when you want to time the market.

Joe Average and Jane Average (Mr. and Ms. Average to you) try to time the market but they fail. There are people who CAN effectively time the market. I’m talking about short term traders. Short term traders (day traders and swing traders in the stock market, and real estate investors such as flippers in the real estate market) can time the market and many of them do pretty well at it.

Here’s why some people can time the market but most people fail at it:

  • Information volume and prioritization: Successful market timers do it effectively because they receive a barrage of information and they filter out what they don’t need. Compare this to Mr. and Ms. Average who glean tidbits from headlines or from the half-wits around the watercooler at break time and act on each piece of limited info that they get, as if the latest piece of information is the most correct.
  • Entries AND exits: Successful market timers consider both entry and exit positions before they buy. To a successful market timer, an “expensive” stock is still cheap if the price goes up and a “cheap” stock is still expensive if the price ends up going down. The same goes for those in real estate. It doesn’t really matter what the entry point is… it’s how much you can sell it for afterward when you are ready to sell. Compare this to Mr. and Ms. Average who likely intend to hold their stocks for decades and who will have to live in their house. They are making entry-only decisions and forgetting that there are other (hard-to-measure) aspects to owning these assets.
  • Mindset: Successful market timers view the (financial or real estate) markets as their “business”. They make money from it. Therefore, they make decisions from a business perspective. The Average family, on the other hand, is looking at buying stocks for their retirement portfolio or their next home and they are trying to weigh their decisions on a much more personal level, which makes the stakes seem higher.
  • Buying a range instead of a single price point: Successful market timers don’t look to one specific price point as THE bottom or THE top. Rather, they expect to buy a range, buying through the bottom and selling through the top and fully realizing that they might miss a few points here or there but overall they are hitting it at the right time. Mr. and Ms. Average, though, see every single low price point as a question (“is this the bottom or will it get worse?”) and every single high price point as the top (“is this the top or will it continue to climb?”). In a way, they are making a technical trading decision without any technical information.

Don’t bother trying. You cannot time the market… at least, not in the way that you want to time the market.

 

Image credit: 2020VG