Have I got a stock tip for you!
February 2, 2012
In late June last year, I enjoyed a 'boys weekend' on the farm of a childhood friend. There were five of us in attendance for a subdued gathering (in comparison to some of our high school outings), consisting of a little beer, some reminiscing, a little beer, some golf, a little beer, the Grade 13 yearbook, a little beer, a few card games, a little beer, not much sleep, and a lot of laughter. I haven't laughed so much in years. Funny how some things never seem to change.
(Side note: On the subject of beer, I must have consumed seven bottles over that long weekend, matching if not exceeding my total intake for the previous seven months. I always was a cheap drunk, much to the annoyance of my friends, who demonstrated that, in 35 years, they have not lost one droplet of their capacity in that department.)
Of interest, the guys introduced me to a card game. They were surprised I'd never heard of it. The game is called 'Screw your neighbour.' Actually, it's a little more blunt than that but this is a family program, so let's leave it alone. Pondering on the name of the game, it's interesting to consider a group of friends sitting around a table, drinking, smiling and slapping each other on the back, recounting stories and pranks from the old days, and at the same time engaging in a game with such an objective. Imagine such a game played with people who are not your friends. Sound like any other game you know?
Well, as sometimes happens among friends, talk turned to investments. Our host, Steve, was curious as to my favourite, so I told him – Southern Arc Minerals (SA.V). He asked why and I gave him the 25 word summary… okay, maybe it was a bit more than 25 words. But… and hear me clearly on this… when he asked, "So, Graham, I should put a little money into Southern Arc, eh?" my immediate reaction was to back him up. "I don't make recommendations. I don't give investment advice. I know neither your circumstances nor your risk profile. Do your own due diligence," I said.
I should say that Steve is retired and has been for some time. No worries on the financial side, I suspect. This said, I make a point of not recommending buy and sell activities for anyone other than myself and my immediate family.
I've known Steve since Grade 6. We grew up together. He was an usher at my wedding and I at his. The stories we could tell… Anyway, like everyone else around that table, Steve was a varsity athlete in multiple sports. If I recall correctly, he was ranked nationally in the top three for his key sport. You don't get to that level without pushing the envelope… and sometimes taking risk. Critical to this equation, however, is the preparation necessary to limit that risk. Practice, repetitive drilling, conditioning, and the study of anything and everything (and everyone) that touches the game. I'm sure his athletic career (not to mention his MBA training) underscored this principle throughout a very successful business career. Take chances, but only after you've taken every possible precaution to limit the risk.
You know where this is going. Steve bought some Southern Arc last summer. Oops! Ouch! And for me, lol!
One ring-a-dingy, two ring-a-dingy. I knew it was coming. I put on my best Ernestine Tomlin nasal and readied myself.
"Graham! What the heck is going on with SA?"
Now, if I had recommended that he invest in Southern Arc, Steve's call might have seen me feeling a twinge of guilt. Not on my shoulders, this one. All I could do is laugh and say, "I told you to do your homework." I'm still telling Steve to do his homework, but afraid that the sum of his response is to call me, asking what's going on. I laugh and give him Hell every time.
This kind of dynamic becomes really interesting when I take calls from people who have done their homework, and are taking grief from people whom they have recommended to buy into Southern Arc.
"Gee, Kevin. As the hub of hubs, you must be really taking it on the chin. Must be tough."
Nope! Not even a teensy-weensy bit! I never recommended that anyone buy this stock… not outside of my own family.
The greatest grief I take is from my stepson, who while still at university, put his beer money into SA. To his questions and challenges, I'm still saying, "Do some homework!" To his credit, he's finally doing just that. On a several-month jaunt across Asia (I'm very jealous), he's now in Jakarta… or maybe Bali already… or perhaps now on a ferry crossing the strait to pay a visit to Southern Arc's Lombok drilling sites.
Not everyone can make the trip to Indonesia and meet the people on the ground and see the drills in action. Not everyone has the time to stay as close to the Company as I do, and as others do. Not everyone has the energy to voraciously read so as to understand more and more about their individual investments. So… they lean on the work and opinions of others who do have and take the time and energy to do the homework.
Here's the thing. On so many levels, we face life's encounters from some point on a continuum of experience, knowledge, comfort, hormones, and wisdom. There's a different continuum for each encounter. Depending on the situation, and your place of residence along the continuum, there's a defined trade-off.
Your level of comfort in merging into high speed traffic will depend on: your self-confidence; your experience at this particular place on the highway; the capacity of the vehicle you're driving; the weather; the time of day, and perhaps other factors. Your level of comfort with investments in the junior resource market will also be a function of a variety of factors, some of which are within your control, some of which are not.
The dilemma for people choosing not to conduct the fullest of due diligence on subject companies for investment is one we all face every day across the full spectrum of decisions. Making a decision with imperfect information is lesson number one in business school. Those of us looking for perfect information are doomed to fail. On the other hand, those prepared to throw darts with a blindfold on are no further ahead. If and when one can find a trusted source, it is possible to move further along toward the safe end of the comfort continuum. On the other hand, when you've got someone like me, doing the homework, but unwilling to recommend – in fact, insistent on not recommending, where does that leave you? On the other hand, if you, for whatever insane reason, trust me, and trust in what I do, can you be faulted if you follow suit?
I could go forever with "On the other hand…" so let's stop there. My point is that, no matter what, when you depend on the input or actions of other people as you make your investment decisions (or any type of decision, for that matter), you necessarily adjust your position along the comfort continuum. You're still making your own decisions, but your basis for these choices is, by your own doing, partly outside of your understanding. You have, in point of fact, given over a part of the control in decision making to someone else. Therein rests the challenge. You make your own bed and you have to sleep in it. While there's less front-end work involved when you rely on others for key inputs, there's a price to be paid, and you have to live with that. The anxiety that comes with turns in events that impact on decisions that you've made will be that much greater as a function of the degree to which you've turned to others in the lead-up to your investment.
Perhaps I should be flattered that Steve has trusted in my judgement. On the other hand, perhaps I should just shut up when people ask me what I've invested in. I understand that it's difficult to separate my actions from recommendations, notwithstanding my insistence on the matter.
Another high school classmate, not party to the boys weekend referenced here, but coincidentally a national champion in the same sport as for Steve, contacted me out of the blue a few months ago and was asking about Southern Arc in the context of another (I'll leave it unnamed, but I'm sure you can guess) Indonesian explorer. I should say that this is a very smart fellow, much much much much smarter than I. He missed a big chunk of Grade 13 owing to world travel for competitions, and still coasted through the academics like a walk in the park. He asked if I thought he should sell his holdings in that other company in favour of Southern Arc. True to form, I refused, declaring myself as never prepared to answer such questions. Remember that this fellow is much smarter than I. He paused for a nano-second, knowing precisely how to peel this onion.
"Okay, Kevin. If you had some free cash, would you invest it in Southern Arc?"
"Yes."
"All right, then. If you had some free cash, would you invest it in this other Indonesian explorer?"
"Not in a million years."
"Thank you. I have my answer."
But did he really? I don't know what he did with his shares of company X. I don't know if he bought into Southern Arc. If he did, he'd be bumping shoulders again with our classmate, Steve, somewhere along a continuum of comfort (or discomfort) with a decision made not from a well-informed position, but based on a casual comment from someone he's met twice in 35 years… someone, I should add, whose relative brain power conjures up the scale-of-complexity juxtaposition of Pong and Grand Theft Auto.
Trust is a funny thing, isn't it? When it's well placed, sleep comes easily. When not well placed, or more to the point, when there's doubt as to its placement, the nights are much more restless.
I can not remember making money on a stock tip. Here's why. It's not because my sources were not good, smart, honest, or well-informed. They may have been all of these things. As well intentioned as tippers may be, they're not me. In the old days, when I bought a stock based on a tip, my own subsequent actions betrayed me out of any potential gains. Without a strong basis for the investment, I was more easily rattled by volatility in share price. What reason did I have to believe that recovery was imminent, or assured in any way whatsoever? None.
I'm firmly of the mind that people who follow stock tips do so only in the service of someone else. Doubt creeps insidiously into their post-purchase thinking. Volatility robs them of sleep. Tree shaking easily liberates their holdings. Buy high. Sell low.
For this reason alone, I now refuse to buy anything I don't know. Don't get me wrong. There are people whom I trust, and people with whom I'll be more comfortable in taking risk. These are few and far between. I had dinner with one of them last week in Vancouver. We spoke on this very subject. His risk aversion is even greater than mine. He won't invest in any deal not of his own doing.
The bottom line is that we all make our decisions and then have to live with them. We each find our own position of what we're comfortable with… or we choose not to be comfortable… and that, too, is a decision.
For my friend, Steve, Southern Arc is no more than a side attraction. It's not a game-changer for him. He's already had his game-changer. SA is a passing diversion. At the same time, being a competitor in all things, he can't let it sit. He'll trade on 15 cent moves, and may add some loose change to his pocket in doing so. The big question is, where will he be when the big pop comes? On the sidelines because he's traded out? Lucky to be a holder? Only time will tell. A buyer in the low 50s, he commented to me in the past week that those who bought at 60 cents must be feeling badly, having missed the bottom. Knowing many who were buying at 60 cents, some in the hundreds of thousands of shares, I should add, my answer, with a laugh, on their behalf, was that these people don't feel badly at all. "They're not looking for 15 cents, Steve. They're looking at tens of dollars." Steve can only laugh back, declaring, "You're nuts!" Maybe so… maybe not so.
The Venture Exchange is rife with shell game scams. That's the perspective of many who dip in and out of trades, and rightly so. Many, if not most, listed companies on this Exchange are what is commonly known as the 'pump and dump'. No real substance. Only a few people make any money there, and they don't normally include retail shareholders.
Southern Arc Minerals is no pump and dump. It's a company in the making. Look at the properties. Look at the people.
Not to belabour points already made many times over, this is a company with a diversified portfolio of highly prospective properties, and JV partners to match. This is a company with tens of millions of dollars in the bank, and an arsenal of 10 drilling rigs ready to go. Pump and dumps don't drill. They finance, leak funds, then finance again. SA has a drilling program on multiple properties, and are raring to go.
With a senior Central Government official on their Advisory Board, Southern Arc is well positioned to address the greatest challenge as assessed by many – the geopolitical risk. Its West Lombok property is further de-risked through partnership with the local Regency.
A representative of the Emir of Qatar sits on Southern Arc's Board of Directors, holding control of 9.9% of the Company. Do you think this one's going to have any trouble raising cash to fund the building of a mine?
In the end, I act as counsel only for myself. For me, this is a no-brainer. Disclosure: I loaded up this year's TFSA with SA at .50. My wife did the same. Even my stepson's a buyer. Goodness, even my 12 year-old added shares at 50 cents to her RESP.
I told John Proust last week that I hoped it would drop to a dime again, and wouldn't be blinking if it did. He just smiled and drove away. Fat chance, but I can always hope.
For you, I have no idea… well, maybe one. The very best stock tip I can offer is not to take stock tips. Do your own homework… and sleep easy.
Best,
Kevin Graham