Habits rule the unreflecting herd. -- William Wordsworth (1770-1850)
There is a little known way to participate in the investment markets that can actually reduce risk while enhancing your chances of experienceing some very pleasing results. From the quote above, it begins by avoiding the herd mentality, and by creating investment habits that are far more likely to create the outcomes we desire. This is intended as the first of a series of articles on this topic.
This secret strategy is lost in the cacophony of noise and "get-rich-quick" schemes that are touted frequently by the publishing and financial media. Yet no matter what the economic environment or the new variables that impact investors, the overall principles of this strategy have stood the test of time.
It is founded on 4 important concepts:
1. Simplicity is more manageable then complexity. In other words, "keep it successfully simple" -- K.I.S.S. The easier a strategy is to remember, the more likely it is that it will be utilized. So I purposely avoid "too much information" (TMI) and share with you the essential, core information that makes this strategy highly reliable.
2. Trust your rational mind (as opposed to your emotions) and learn to trust your instincts to help you "connect the dots" going forward concerning what to invest in, when to invest and how much to invest. No one in modern times has said this better than the late CEO of Apple (AAPL), Steve Jobs. I'm not sure when he said the following, but he believed these words:
You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something – your gut, destiny, life, karma, whatever. Because believing that the dots will connect down the road will give you the confidence to follow your heart even when it leads you off the well worn path; and that will make all the difference.
Every article and book I've ever read about Jobs clearly demonstrates how true these words are and that he lived them all the way to the end of his human journey. By the way, AAPL is sitting right at its 200-day moving average. To follow the KISS principle, I present the following chart that shows, as Steve said, "looking backwards" -- how AAPL stock would hit or go slightly below its 200-day MA and then use it as a launch pad for its next rally higher:
As you can see, the last time AAPL fell to or below it's 200-day MA was around July 8, 2011. We can see what it did shortly thereafter. There's no guarantee this time will be similar, but the historical evidence is quite compelling. Apple's share price is also supported by remarkable fundamentals that have been repeatedly discussed here at Seeking Alpha. All I have to do is look at their balance sheet, production track record, current and future PE ratio, and I'm focused.
Concept #2 has a lot to do with knowing yourself, giving yourself the benefit of the doubt, and trusting that you can learn new and better ways to achieve positive investment results.
3. Know precisely what you want to experience and achieve. Don't be distracted or easily dissuaded. Zero in on the outcome and precisely what you must discover in order to reach that outcome:
The Law of Floatation was not discovered by the contemplation of the sinking of things. -- Thomas Troward (1847-1916)
That's why I'm focused on great businesses that are publicly traded and have the potential to be the next Barrick Gold (ABX), Microsoft (MSFT) or Devon Energy (DVN). For example, I'm carefully watching, reading about, and learning all I can about Alexco Resources (AXU). AXU, with a forward PE of slightly more than 5, engages in the exploration and development of mineral properties in Canada, primarily in Yukon Territory.
The company principally owns 100% interest in Bellekeno property comprising 70 surveyed quartz mining leases and 14 unsurveyed quartz mining claims located in the Keno Hill mining district of the central Yukon Territory. It explores for silver, lead, zinc, and gold ores.
The company also provides consulting and project management services in respect of environmental permitting and compliance, and site remediation and reclamation in Canada and the United States. Alexco Resource Corp. was incorporated in 2004 and is headquartered in Vancouver, Canada.
I've taken my time studying this company over the past several years. It appears to have a very seasoned, successful management team, and at some point appears poised to be a takeover or acquisition target. When I crunch the numbers and see their stated company goals, I can imagine AXU shares being worth 3 or 4 times what it's selling for today.
The company announced its first quarter fiscal 2012 results Monday, November 28. I encourage you to read the press release.
AXU is just one example of how our secret strategy can lead to potential winners among our stock selections. We try not to be over-confident, and usually we won't use more than 5% of our investment capital on any one investment selection.
Another example is Endeavour Silver (EXK), a silver miner that discusses its operation in detail here. Billionaire Eric Sprott is evidently invested in it, and offers advice to the top executives of silver mining companies like EXK. Ed Steer of Casey Research stated on 11/25/11:
I was intrigued by Eric Sprott's comments about silver mining companies saving parts of their cash reserves in silver instead of just sticking it in the bank.
As I pointed out in this column a couple of weeks back, Endeavour Silver has already squirreled away 270,000 ounces...and if Eric can convince other silver companies to do the same thing, this would be beneficial to them...and to us as shareholders once the silver price starts to run to the upside.
The silver and gold exploration and production companies, especially the smaller, better run ones, are the kind of investment that can lead to outstanding results.
Don't forget though, there is still a correlation between reward and risk. If you're swinging for the fences, you're taking higher risk. But it doesn't need to be dumb risk. Do your due diligence and know all you can about it before investing.
4. Timing is more important than we want to admit. It's as important as contemplating, researching and creating a carefully honed wish list. A good example of this is Mexican food restaurant chain Chipotle Mexican Grill (CMG). Take a look at this chart going back to the end of 2006:
CMG was founded in 1993 and is headquartered in Denver, Colo. From 1998 to 2006 McDonald's Corp (MCD) owned a majority interest in CMG, and spun off or divested that majority interest in 2006. (Look what happened in the chart above.)
If we'd been watching CMG patiently after MCD unloaded its shares, we would have eventually had a Black Swan opportunity -- like the last quarter of 2008 -- to buy CMG shares at the bargain-basement price of around $40 a share.
Some market analysts are saying that this period (July 2011 through November 2011) reminds them a lot of late 2008 when it comes to the stock market. That means we may be able to find the next CMG while its shares are on sale.
The "secret" about this strategy is that few people want to admit its time-tested validity, nor do they want to exercise the patience, due diligence and self-control necessary to make it produce the positive results that investors greatly desire. It reminds me of the poem by Robert Frost (1874-1963), "The Road Not Taken" -- also referenced by Steve Jobs in his quote above:
I've always loved the part that reads:
Two roads diverged in a wood, and I
I took the one less traveled by,
And that has made all the difference.
As we apply this K.I.S.S. investing strategy, one that is "less traveled by," I believe you'll find it will make a great difference in your investment experiences and hopefully your results as well.
Consider it carefully, and as Steve Jobs stated it, it should connect you down "the road [that] will give you the confidence to follow your heart even when it leads you off the well worn path; and that will make all the difference."