‘My centre is giving way, my right is retreating, excellent situation, I am attacking.’
Marshall Ferdinand Foch sent this message to Marshell Joseph Joffre during the Battle of the Marne in September 1914.
The French checked the German advance at the Battle of the Marne. It resulted in both armies digging in for four years of stalemate and trench warfare.
Investing in markets today is akin to a battle. Relentlessly rising bond yields, ongoing war in Ukraine and a new front now in the Middle East. ‘Sticky’ inflation. Liquidity non-existent at the smaller end, resulting in a nasty bear market. Meanwhile, many large cap stocks escape relatively unscathed.
For long-term investors, the situation is excellent.
As I often say to readers of my service, Fat Tail Investment Advisory, you only get true value where there is deep uncertainty, fear and confusion.
Stock prices are very good at discounting news AND investor emotion. When fear and uncertainty reign, it manifests in a lower share price.
This is something I talked to former geologist and commodities specialist James Cooper about in this episode of What’s Not Priced In.
James pointed out that while the big miners are only 15% or so off their all-time highs, many juniors have been absolutely smoked. This is where the opportunity is. You simply need a strong stomach and a two year time horizon.
A great example of this is Chalice Mining [ASX:CHN]. It peaked at over $10 a share in November 2021, which coincided with the peak in investor sentiment and general market liquidity. Yesterday it closed at $1.82.
That’s a fall of over 80%!
What has changed to cause this huge decline? Fundamentally, nothing. Chalice’s deposits are world class. You’re now able to buy a share in these projects for 80% less than what they were going for two years ago.
That’s the thing with ‘investing’. When a share price increases, punters want to jump on board to get a piece of the action. They don’t care about the deposit, or the company’s prospects. They care about share price momentum.
Of course, some will be true believers. At $10 a share, the true believers are eyeing $20 and $30 a share in the future when the prospect turns into a development and production asset.
But when the share price turns down, the momentum punters get out first. Then, slowly but surely, the true believers start to have their doubts. And they get out too.
They realise that production is still years away (2029 in this case) and that maybe they’d be better off in a high interest term deposit ‘until the dust settles’.
This is how changing market psychology impacts share prices. As I mentioned to James in the interview, when companies don’t have revenues or earnings, there is huge scope for investor sentiment/imagination to drive the price higher or lower.
When companies have genuine earnings, there is a certain anchor around value. When they don’t, there is no anchor and the fluctuation between the highs and lows can be huge.
That’s why, at the peak, the market put a value on Chalice of nearly $4 billion. But now, two years down the track, it says it’s only worth $790 million.
Which one is right?
Neither. They’re both estimates.
Which one is likely to make you more money over a two year time horizon?
You know the answer to that.
The only thing stopping you from buying (Chalice or any other beaten up junior) is the fear that prices will keep falling.
In some cases, they will. And deservedly so.
But in many, the prices on offer today are likely to be absolute bargains. And I say that knowing that prices could well continue to fall. But when the turn comes at this end of the market, it comes fast.
Smart investors are better off to lay some bets during this bombed out period, then sit back and enjoy the turn when it comes. Because I believe that it will.
I know that’s what James Cooper is doing. His advantage is that he knows a good deposit from a dud, and a good management team from a bunch of hustlers.
To be clear, he’s not calling a bottom here. That’s a mug’s game. But he certainly thinks there are plenty of bargains on offer, and you’d be mad not to take advantage of the fear and loathing going on in the junior mining sector right now.
As Foch said, it’s an ‘excellent situation’.
For Fat Tail Commodities