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Ben Turney & I recently published a new e-book, The 49 Golden Rules of Making Money from Oil, Gas and Mining Shares. You can get a free copy sent to you by filling in the form HERE. But as a taster here are rules thirteen and fourteen.
Thirteen: Take profits & sell spikes
I cannot make this point often enough, but always take profits in the resource game. Above all, always sell spikes, especially among the juniors.
No one ever went bankrupt taking profits.
Sure, we all will have a story like “I bought Gulf Keystone at 12p, sold it at 30p and watched it fly to £2.50”, but success in this game is based on playing the averages. For every Gulf out there ( now back well below 100p), there are dozens of companies, which have shot higher at one point or another on a speculative flourish, only to crash back down to earth once reality has kicked in.
And reality always kicks in at some point.
One of the temptations of investing in oil & gas and mining stocks is the promise of the “jam tomorrow”. However, what can often be forgotten is how much money will be required to make this jam and how long it will take.
You might be especially confident in the prospects of a particular stock, but even if this is the case halving a position for a healthy profit and a risk free run is generally a good move. Remember the old investing maxim – “always leave some on the table for the next player”.
Fourteen: Don’t fall in love, cut your losing positions
Perhaps the most destructive force during a bear market for investors in the resource sectors isn’t the bear market itself, but rather the dogged obstinacy of people to hang onto their stocks, come what may.
It is funny, but selling a losing position can be one of the hardest things for any investor to do. There is something about the psychology of realising a loss and admitting an error that makes it very difficult for people to perform what is perhaps one of the most important disciplines in successful investing.
Ben says that for him, “as a general rule, I tend to allow my positions to move 7% (after dealing costs) against me before cutting them or at least reducing my exposure. Possibly I hang on a bit too long or possibly I don’t hold on for long enough, but I have found a method that works for my style of investment. It is the strict enforcement of this rule, which helps safeguard my portfolio.” Perhaps we would all been better off if we’d followed that rule. I don’t like stop losses but in this sector I am tempted, burned by bitter experience.
Once you have picked a consistent point to which you will hold a stock, then stick with it. It won’t work in your favour all the time, but if you do not already operate this approach, it should make a huge difference to your long term performance.
Excellent article, Tom!