I think there’s a rule in the stock market that says: “If you buy a junior resource stock today, it will immediately decline and then falter for quite some time.”
I’m joking, of course, but I think most junior resource investors will tell you that this has happened to them at least once (more likely: a dozen times).
I love junior resource stocks but they are not easy stocks to own! If you own junior resource stocks, or think you might like to own them, here are 4 qualities you’ll want to have. Trust me when I tell you: If you don’t have these qualities, don’t invest in junior resource stocks!!!
A PASSION FOR DUE DILIGENCE
It sounds like an oxymoron to put “passion” and “due diligence” in the same sentence. However, junior resource stocks are speculative and there are a lot of unknowns when investing in them. You’ll reduce the risks and increase the potential of gains by doing your due diligence first. Don’t make the mistake of just investing because someone you know has also bought that stock and is doing well with it.
Also: Due diligence is not a one-time even that you do once just prior to buying a stock. I believe due diligence is something you need to do over and over and over again — before you buy, before you sell, and regularly in between. Due diligence activities should be “triggered” by your own decisions and by external market forces. You should always be asking yourself: “Does this event change the reason that I bought the stock in the first place?”. Click here to learn how to do due diligence on a junior resource stock.
There are many many many good people in the junior resource industry. They mean well, they’re hardworking, they’ve made some exciting discoveries, and they have some good insight to say. But there are the losers, too; the ones who see a junior resource stock as a great way to make some fast cash from an IPO before letting the company fall in value, or those who pump and dump stocks, making money on the gullibility of investors rather than the stock’s fundamentals. You need a very sensitive BS-O-Meter that can detect the slightest whiff of something being off.
EXTRA MONEY THAT YOU CAN AFFORD TO LOSE
I almost didn’t include this one because it is the most depressing of them all. But junior resource stock speculators should really be investing money that they can afford to lose. I’ve seen too many people who dump their life savings into stocks, only to watch those stocks decline. Don’t do it! The entry point to buying juniors is pretty low. So buy only with money you can afford to lose. This isn’t an alternative to buying a lottery ticket.
This is probably the biggest one. It was originally inspired by Rick Rule of Sprott Resources, an articulate thinker in an industry where those qualities are far to rare. He referenced courage in a talk he gave at an industry conference a couple of years ago and although he didn’t go into great detail about it, I think he was referring to these two types of courage.
Investors need courage to look past the unknowns: There are many unknowns in the industry and anything from politics to natural disasters to public sentiment can suddenly shift the stock price. So you need to do as much due diligence as you can to eliminate as many of the unknowns as possible, and then you need courage to live with the rest of the unknowns.
Investors need courage to act when their emotions are advising something different: All too often (and even in stocks that aren’t junior resource stocks), investors will buy when the price is high because everyone is excited about the stock, and then they’ll sell when the price is is low because they’re afraid of losing even more money. This all-too-common practice (ironically, even among conservative investors) is the exact opposite of what should happen. Investors should buy when prices are low and sell when prices are high. Of course, that sounds good in theory but it’s much harder to do in practice. Write down the reasons you bought a stock and then remind yourself of those reasons when you’re wondering “should I sell this stock?”
Investing in junior resource stocks is not for the feint of heart. It’s not for the weak-willed or people who love to jump on bandwagons. Only invest if you have these 4 qualities! I think it’s fun. But it’s also worrisome and time-consuming and mind-boggling at times! Invest at your own risk!