Thread by @BambroughKevin

When I get asked for #investing #advice from young people in their 20’s and what they should read etc. Here’s how I typically respond in a thread:

I explain that the first two steps are:
1. figure out what kind of investment style you are best suited for and
2. then try to become as much of an expert at it as you can and find an edge that yields repeatable performance

One way to attack step one is to moderately acquaint yourself with famous successful investors and then dig down deeper into the ones that you relate most to and find to be similar to you in personality/habits

I found it helpful read books like @jackschwager ‘Market Wizards’ series as they tell the stories of many great traders and ‘how they did it’ was both inspiring and informative.

Market wizards gave me the investing bug back in the late 90’s but when I read “Reminiscences of a Stock Operator” I found my style and how I wanted to approach the markets and then on to step 2.

I then read books on technical analysis and tried to study all the various experts and their techniques so I could incorporate short, swing trading on top of my long term macro based common sense approach to trying to make money.

For me, my skill set (and lack of certain skills) lead me to be a long term cycle investor and a contrarian. I knew well that in long upward trending bull markets I simply wasn’t the type to put in the work to outperform the crowd.

So I really dug down on trying to understand boom bust cycles of all types. I read up on nearly all the great bubbles and crashes, plus times of great volatility or hyperinflation.

I added in the study of macro investors that really nailed some big boom bust cycles and that’s when I found what I believe would be the best sector to invest in over the course of my life and developed technics that suited me best

Commodity Resource investing is hugely cyclical and a longterm disciplined approach to investing in it leads to massive out performance with repeatable predictable results.

Each bull market in a given resource sector typically peaks with high prices, high margins, record profit and attracts massive new investment.

Each bear market ends with bankruptcies, write-offs, write-downs, shut downs, layoffs, closures and abandonments. ‘Over supply’, ‘glut’, record lows, no margin, disinvestment.

When you see these words in articles and financial reports know that the sector is likely peaking or bottoming.

It’s this bottoming time that fortunes are made from by buying the correct assets with a 5-10 year time horizon.

So what do I look for? Well, I like to hunt for things that smart people spent huge dollars on in the last resource bull market that are now selling for Pennie’s or less in the dollar.

In the mining sector each boom bust cycle sees mines both restart as well as new mines start up for the first time. But, know that some most of these mining assets take 2 or 3 cycles to first become a mine and sometimes more

Grassroots projects or ‘Greenfield’ mining claims are financed to be leased and explored each new bull cycle and some discoveries are made. But, they say probably less than 1 in 10,000 exploration projects ever become a mine.

It also takes more then a decade (17 years according to recent reports) for a project to become mine since resource bulls can be a short as a few years and typically less than a decade long (prob 5-7 usually) the bear market will inevitably crush the value of exploration assets

At least once or twice even in the rare successful mines journey from start to finish. I point this out to remind everyone not to fall in love with your mining assets and be prepared to sell nearly everything when a sector peaks.

Now the good news is that each bear will see $100’s of millions if not $1 bln spent on exploration, drilling, engineering, environmental studies, feasibility, permitting, etc that gets tossed away for next to nothing in a bear and when bought.

And held until the next bull huge increase in value can be had. 10x 20x or much more.

Now focusing on what assets to target with respect to risk to reward… I personally like the prospects of buying projects at the start of a new cycle that were the most proven last cycle…

And also heavily invested in. Over the decades of hunting in bear markets I’ve come across proven assets that bottom in value at 1/10 or even 1/50th of what was spent on them in the previous bull.

It’s hard to imagine but at the depths of a nasty bear it’s possible to find assets that saw last cycles investors spend upwards of $1bln fall to just $20mln value. Other assets where $100mln was spent sometimes actually get abandoned or are simply held by a shell company…

And valued at a couple million or less. The impatient market participants are simply is not willing barely even fund companies to pay government fees to hold on to exploration assets.

There’s also companies that put producing mines into care and maintenance because the commodity price has fallen so low they can’t even make an operating profit and those assets are often sold off at a fire sale to prevent bankruptcy or as part of a restructuring in bankruptcy

I’ll do another thread sometime to highlight key milestone points and a couple sweet spots that offer the best risk to reward (given the fact I’m not a geologist, mining engineer and prefer a generalist common sense approach.

Hope some of you asking for advice find this helpful

Being asked for advice on what #commodity specific books I can recommend. Nothing in particular jumps to mind other than in my early days read @jimrogerstweets books, Investment Biker, Adventure Capitalist and Hot commodities and loved @gloomboomdoom book Tomorrows Gold

But to be honest the most useful reading exercise based on my approach (not Geo, not engineering, not try to understand the mining asset better than anyone else to create value) is to read mountains of annual reports and analyst reports, but not just current ones….

The real eye opener that should make a light bulb go off in your head is to look at the boom bust chart of big mining companies and read what the management team was saying at market peaks vs market bottoms via their quarterly, annual reports and acquisition/divestment PR

Then also with a focus on market tops and bottoms study what the brokerages and bank analysts were predicting at those key inflection times.

Very valuable knowledge will be gained…

Some Lessons:

99 percent of management teams never call the top publicly or say anything remotely close.

Even the smart ones that sell their companies and retire do so quietly.

Management teams, analysts, and journalists rarely deviate much from the commodities future curve when it comes to predictions.

To actually nail tops and bottoms you need to be a complete contrarian and focus on ‘checking boxes’ that indicate we are likely topping or bottoming

This exercise will also help you understand how analysts and the market value resources at the bottom and top.

Stand outs will be:

In the bear bottom exploration assets are assigned next to no value. Cashflow multi focus based on life of mine remaining w/commodity price curve

Valuation is nearly solely based on operating cashflow with small value to potential future gains if when the commodity price rises. The market is basically giving away massive free call options on the potential increase in asset value that will happen when commodity prices rise

You will have to do the work on your sector of focus to understand how exploration and producing assets typically get valued at the peaks, bubbles form and analysts struggle to justify ‘buy’ ratings and upward price forecasts that their bosses demand.

High P/E’s or even EBITDA growth becomes the focus of reports. (Remember, the brokerages employ analysts for the most part to help their corporate finance guys win mandates from companies and fees. Companies don’t give investment banking business to firms with sell ratings)

A big part of the game for me has always been to study what the ‘Majors’ will want to buy and when they will likely buy it. Find assets that are being thrown away during the bear markets and invest in them especially when the plan is simply to advance the asset without much risk

A good way to do that completing environmental assortments and permitting hurdles that often take years. This eliminates exploration risk and prepares the asset for a quick high valued sale in the next bull because quick to new production typically means a chance to capitalize…

on record pricing and cashflow / payback capex to build, restart or complete a mine.

When you think about discounted cashflow valuation (DCF) or net present value (npv) knocking years off the permitting process is a very high value add.

Another big take away is that the market gives a much greater valuation to larger diversified miners. Have them buy out smaller miners at a premium to the market is the best way to get max value from juniors. So make sure your management team is focused on that..

CEO’s that are mostly focus on their compensation from salary and options will be content / prefer to ride the cycles and never monetize. They worse amongst them focus on acquisition not for accretion for shareholders but for the sake of growing market capitalization

Big market cap = justification for big salary and huge option package.

Summary this exercise of looking at historical commentary in valuation by industry players will teach you to understand exactly what sorts of assets go up 10x 20x or 100x over the course of a new bull

You’ll come to also understand all the catalysts that allow management teams to creat or unlock value.

Then an only then can you pick the best entry and exit points along the road from exploration to production to reclamation.

End of tweet… this was a monster. :)

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