For some, investing in junior stocks seems akin to fortune telling: It's just guesswork and luck. To others, it's a speculative science. Unlike blue chip stocks that move slowly up or down within a range, junior stocks move rapidly and can rise or fall dramatically on a single piece of news. Understanding how this works and trading successfully with junior stocks takes some skill… but the opportunity to make a lot of money is there.
It's the combination of volatility and economics that make this possible and particularly attractive right now. The volatility of smaller stocks creates faster-moving opportunities while the economy is compelling infrastructure-feeding junior stocks to rise.
We spoke to Mickey Fulp, "The Mercenary Geologist" recently about his trading philosophy and technique. Mr. Fulp is quick to point out that he is not a licensed adviser and that his ideas are for information only and should not be construed as specific advice or recommendations. Mr. Fulp further expands these ideas in an article called "The Power of Two". "It basically discusses my investing philosophy," says Mr. Fulp.
Trading in the junior markets, according to Mr. Fulp, is active work. You cannot be passive with a buy and hold strategy as you might be tempted to do in the blue chip market. Rather, traders in the junior markets need to stay focused on the market and pay attention in order to react quickly. (However, he does later give some techniques for traders who might not always be able to watch the markets). "I'm a firm adherent to the philosophy that you must trade junior resource stocks," says Mr. Fulp. "There are no buy-and-holds in this business. These are speculative stocks. You need to trade with your discretionary money – your 'fun money' – something that is not going to mortgage the house and send the wife and kids packing."
Mr. Fulp's technique works like this: He puts his money into a stock he thinks will double. Then he watches the stock closely and as soon as it doubles, he sells half. "The idea is to trade (not buy and hold) and on every junior resource I invest in, I sell half when it doubles."
"Here's an example. Let's say I put $10,000 into a chosen stock that I’m convinced will double within 12 months… when it doubles I sell half. So I still have my original investment of $10,000 and I still have my position in company number one."
The idea here is to stop trading with your own money as quickly as possible. By selling half at the doubling point, he is able to take out his initial investment so that the money he has in that stock is no longer his original stake.
Then repeat.
Buy another junior and watch for it to double. When it doubles, sell half. By doing this, you'll once again remove your original investment capital and you'll be trading again with money that you've earned by the increase in value.
Getting back to Mr. Fulp's example, after selling half when the company doubles, he does it again: "I buy a stock that I consider to be undervalued and when it doubles I sell half. At that point I have $20,000 in stock and I still have my original $10,000 investment in cash. So you do that five times and you have $50,000 worth of stock and you've preserved your original capital."
Just keep repeating it over and over to make money. "Do it ad infinitum," says Mr. Fulp.
This is a far more active way to trade the market, which makes sense since junior stocks can rise and fall rapidly.
"The key," says Mr. Fulp, "is to buy low and sell high: Buy on low volume when no one wants them and sell on high volume. This is a contrarian philosophy. And when the stock doubles you sell half and take all of your money off the table. "
This works in both bullish up-markets and bearish down-markets, so investors can apply this technique even when things look rough. However, this investing method (like any other) is not a hands-off method of training. It's always important to do due diligence before investing in any stock. "It's an infallible way to make money in a bear market or a bull market – either one… but the key is, you have to pick good stocks."
But how do you pick a stock, knowing that it will double? Although due diligence is an absolute must, Mr. Fulp points out that junior resource companies are volatile and the price can rise. "If you look at the junior resource stocks, I dare you to find one exploration company that doesn't have a double at least every year between its 52-week high and its 52 week low."
And what do you do if you can't watch your investment too closely but you want to make more money or not lose the money you've earned? "I'm in the field so often, I don’t always have access to my brokers. So, I program-sell on the up-tick," says Mr. Fulp. "I take all of my money off the table (after the stock doubles) and then I'll sell the stock in intervals as it continues to rise. I also put in stop losses so I sell on the down-tick. The markets teeter-totter, so if we go from a bullish to a bearish market, I'll protect my earnings."
While Mr. Fulp isn't a licensed adviser, the strategies he shares are effective ways to remove emotion from trading and (when the right stock is chosen) to preserve your capital.
Reference
www.mercenarygeologist.com
Read "The Power of Two" article here: http://www.goldgeologist.com/mercenary_musings/musing-100510-The-Power-of-Two-A-Primer-for-the-Lay-Investor.pdf
Get more "Mercenary Musings" here: http://www.goldgeologist.com/geologist-mercenary-musings.htm