A Monday Morning Musing from Mickey the Mercenary
The most important concept of my investing philosophy in the junior
resource sector is the Power of Two. It was first discussed in slightly
different terms shortly after I launched my website a little over two years
ago (Mercenary Musing, May 19, 2008).
The Mercenary Geologist investing philosophy requires actively trading
stocks. There are no “buy and hold” scenarios in my portfolio.
That said, there are trades and there are
investments but that’s a subject to be tackled in a future musing. My
trading methodology employs a very conservative strategy to speculate in a
very high risk market sector.
As I have reiterated time and time again, junior resource “investing”
is actually gambling. Use your discretionary funds, your “fun
money”, money that you can afford to lose without risking the house,
the wife, and the kids. My trading style is designed to skew the gambling
odds in my favor and turn that fun money into more money.
Stocks in the junior resource sector are not suitable for your IRA,
401K, or RSP. Retirement accounts should contain lower risk, relatively safe
investments. If properly managed, they will produce steady but unspectacular
returns over the long haul. There is nothing “safe” about trading
your hard earned dollars for a fancy piece of paper from a junior resource
Now let’s get back to the Power of Two. Here is a simplified
example of how it works:
Buy shares in a junior resource stock that you have researched thoroughly and
think that it will double in price in 12 months or less. Let’s say you
invest $10,000 in a 20c stock, buying 50,000 shares.
When the stock doubles, sell one-half of your position. Your cost basis for
the remaining half position is now zero. You have taken all your money off
the table and are playing this stock with house money; i.e., other
people’s money. You now have $10,000 cash and own 25,000 shares worth
Take your original $10,000, do detailed due diligence, and invest in another
junior resource stock that you think will double in twelve months or less.
Again sell one-half upon a double in price. You now own one-half of your
original positions in two companies, have zero cost basis, and shares
$20,000. With your original investment of $10,000 still intact, your worth in
cash and paper is $30,000.
Do it all over again.
Then again and again.
At iteration five, you have maintained but not increased your original
$10,000 investment. You have a zero cost basis and hold half of your original
holdings in five stocks that are now worth what you originally paid for them.
You have $10,000 invested in company number six. In cash and paper your gross
is now $60,000. By trading five stocks at the point when they doubled, you
now have the net worth of a five bagger and have preserved your original
I’m ignoring brokerage fees in this analysis but even using a
full-service broker, they should not amount to more than 2% of your gross
trading amounts. You can add those fees into your selected sale price to
achieve a net double on your trades.
While you play the market smartly, the average lay investor hangs on
for two, three, or four years for the proverbial five or ten bagger that
never comes with his warmed-over casserole of a dog’s breakfast
portfolio. Because he buys and holds and does not trade actively or efficiently,
he wins some and he loses some on paper. The proportions of each are
largely dependent on the overall bullish or bearish condition of the stock
market. Most often he ends up holding a bunch of worthless paper in
fly-by-night juniors since at least 95% of companies eventually fail in the
However, doubles within twelve months are the general rule in the
junior resource sector. Examine the 52 week high and low of all the penny
exploration stocks that are active and try to find more than a handful that
have not traded at two times their lows, or if you’re a pessimist,
one-half of their highs year over year over year.
Though doubles are the rule, five or ten baggers are a very rare
commodity even in our most speculative of businesses. The fact that they
happen occasionally is what attracts gamblers to our sector. And like the
addicted gambler who fails to cash in his winnings and leave the table, the
average investor waits too long to sell his paper gains and they eventually become losses. Meanwhile, you my friend
have become a wildly successful speculator by employing a disciplined trading
In a bull market, this trading philosophy is an infallible way to make
money. The continuing secular bull market in commodities, even with recurring
10-30% corrections and episodic bear phases, offers ample opportunities for
the junior resource speculator to prosper. Market corrections and bear dips
within the overall cycle present good buying opportunities.
The key for success is to pick good companies based on thorough
research and due diligence into three criteria (Mercenary
Musing, December 15, 2008):
Adopt a contrarian philosophy and buy particular issuers based upon
these fundamentals when no one wants them, i.e., when volumes are low, the
share price is down, and they are undervalued with respect to their peers.
Sell half upon a double and do it again and again and again, ad infinitum.
A corollary to my trading philosophy is trading your zero cost basis
shares. Program selling of tranches at regular intervals on the upticks
and putting in trading stops to cover potential downticks will maximize your
profits. Wealth is not and will never be made of paper in the stock market;
otherwise the government surely would tax you on the value of your stock
certificates. You must monetize those gilded paper certificates to realize
gains or losses.
Programmed trading of stocks when they double and at regular intervals
on the uptick leverages the Power of Two (and Three, Four, and Five!). Be
logical, be disciplined, be systematic, and be unemotional in your trading
In other words, adopt a Vulcan philosophy. May you live long and
Ciao for now,
The Mercenary Geologist
Geologist Michael S.
“Mickey” Fulp is a Certified Professional
Geologist with a B.Sc. Earth Sciences with honor from the University of
Tulsa, and M.Sc. Geology from the University of New Mexico. Mickey has 30
years experience as an exploration geologist searching for economic deposits
of base and precious metals, industrial minerals, coal, uranium, and water in
North and South America and China.
Mickey has worked for junior explorers, major mining companies, private
companies, and investors as a consulting economic geologist for the past 22
years, specializing in geological mapping and property evaluation. In
addition to Mickey’s professional credentials and experience, he is
high-altitude proficient and is bilingual in English and Spanish. From 2003
to 2006, Mickey made four outcrop ore discoveries in Peru, Nevada, Chile, and
Mickey is well known throughout the mining and exploration community for his
ongoing work as an analyst for public and private companies, investment
funds, newsletter and website writers, private investors, and brokers.