Tuesday, January 25, 2011

Tips On How To Pick A Good Junior Explorer Stock

They come from Ian Gordon of British Columbia-based Longwave Group, who claims a 10-year real-time return of about 70% per year in his RRSP. This return was helped by the fact that he got a ten-bagger in 2002 plus his assumption of risk by concentrating his RRSP wholly in exploration juniors. It hasn't been verified. (At that rate, the funds in his account as of 2000 would have gone up 200 times in those ten years.)

The rules, excerpted from his 25-rule list to his clients, are:
  1. Follow the big companies that have taken a minority stake in a junior, by buying that junior. Any stake of 10% or more has to be disclosed by Canadian law. An example of this kind of stock is Evolving Gold.
  2. Get ideas from the holdings of savvy mutual-fund managers, like Pinetree Capital, Sprott Asset Management, Van Eck Global and Tocqueville Funds. An example of this kind is PC Gold, in which Sprott has a 10% stake.
  3. Focus on stocks that are exploring on or near old producing mines, on the theory that the low-risk gold is likely to be found in those areas. An example of this kind of stock is Trelawney Mining.

If you have as spectacular a run as Gordon claims, you can easily absorb a 50% loss to the entire portfolio. [One return-booster would have been buying explorers in October-November of 2008, when stocks now selling for dollars were selling for pennies. Given the climate of the time, though, it would have taken a lot of faith and a fair bit of bravery to do so. Also, in order to score those kinds of returns, the best of the lot - in retrospect - would have had to have been picked.] For someone hoping to get in now, a 50% loss would be devastating. As a caution, I pass along this piece of advice from Jim Puplava: get comfortable with the idea that your junior stocks will drop by 25% or so. They may.

In the spirit of the time, Benzinga has an article predicting that junior stocks will be the darling investment of 2011, building upon 2010's gains. The author emphasizes that an investor has to be very choosy, and cautions on doing the due diligence, but offers few tips on how to do so. Needless to say, it's a jungle in there.

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