This Week’s Commentary – March 3, 2007 – Yikes

As regular readers know, I started this site for two reasons (as described in The Point of This Site):

First, I want to keep track of why I do what I do. Why did I buy that stock when I did? Why did I sell it? By recording everything, I can see my thought process, and hopefully learn from my mistakes.

Second, with the Buy High Sell Higher Forum, I can learn from all of you. As I write this there are 124 registered members, and 256 posts, which means I (and everyone else) has had 256 opportunities to learn from each other. I think that’s great.

There are days when I start to feel pretty smug about how things are going. For example, in the last week, this site and the Forum have had over 10,000 pageviews, and 80% of the visitors to this site are returning visitors, meaning many of you check back regularly. When you consider that I started this site just over three months ago, that’s pretty good. And it felt really good writing my commentaries at the end of the year bragging about how I was up 94% last year. Smug indeed.

But to repeat, the purpose of this site is to learn, so let’s look at some numbers:

Here’s my gain for the year, as of the close of business on the following selected dates:

• January 10 – down 10.5%
• January 13 – down 6%
• February 13 – up 5.9%
• February 19 – up 12.1%
• February 26 – up 19.5%
• February 27 – up 8%
• February 28 – up 10.3%
• March 1 – up 6.9%
• March 2 – up 0.9%

In other words, I lost 10.5% in the first 10 days of the year, then gained almost 30% so I was up almost 20% on February 26, only to lose it all this week.

Yikes. I guess I’m not as brilliant as I think. Two months work for nothing.

So, since I want to learn from my mistakes, what have I learned?

First, stock markets are volatile, and uranium stocks are even more volatile. You can lose 20% in one week. Believe me, you can.

Second, to paraphrase Robert Burns, “the best-laid plans of mice and men often go awry”. I assumed my portfolio would get to a gain of around 50%, just like last year, before the consolidation would start; by then I would be 50% or so in cash, so the consolidation would not wipe out all of my gains. How wrong I was.

(In his poem To A Mouse he actually said “The best laid schemes o’ mice an’ men / Gang aft a-gley.”; since I don’t understand what “Gang aft a-gley” means, I thought paraphrasing was necessary. Follow this link for the full text of To A Mouse, On Turning Her Up In Her Nest With The Plough).

Huh?

Why am I quoting a guy who died 210 years ago?

Because this is a family blog, and it’s a classier way of saying **** happens.

As I was running on my treadmill on Tuesday morning, watching CNBC at 6:00 am, I watched the discussion of the collapse of the Chinese stock market. I didn’t even know China had a stock market, but it collapsed, and next thing you know, my 20% gain on the year is back to break even.

In hindsight, should I have been prepared for the collapse of a stock market half a world away? Perhaps, but I don’t think so. Sometimes stuff happens.

I then asked myself, what has changed? Did the world find a new source of energy, making uranium obsolete? I just did a Google search, and the answer is no. A slowdown in the Chinese economy may slow the growth in demand for energy, but it certainly doesn’t justify a 20% drop in my portfolio this week.

Upon further reflection, I realized nothing has changed since last week, except perhaps the speculative frenzy has been reduced. To prove my point, I added a new page to the site this week, called The Case for Uranium. The article contains nothing original, but the process of writing it convinced me that, in fact, nothing has changed. Uranium shares are still great investments.

In addition, given the volatility in this market, I should not get excited about a 30% gain in a few weeks, and I shouldn’t be overly concerned about a subsequent 20% drop. In fact, as Sector_Y pointed out in their first ever post on the Forum about the State of the U308 market, significant corrections occur every few months in the uranium market, and more should be expected in the future. (That post was very insightful; it’s worth another read, or a first look if you missed it the first time).

So what’s the conclusion?

I think this week will tell the tale. If we start off with a few down days, it will be time to significantly lighten the portfolio and move into cash to see where this shakes out. My guess, however, is that like all past consolidations, this is the pause that will lead to higher highs.

Here, then, is my strategy:

I will become somewhat more conservative, and increase my cash component to whatever level of gains I have had so far this year. In other words, once my portfolio increases 10%, I will move 10% of the portfolio into cash. If I get back to a 20% gain like I had at the start of the week, I’ll be a little smarter and move to a 20% cash component.

Does this make sense? Or would another strategy be more sensible? For example, based on market value, my portfolio is now 74% in uranium, 15% in precious metals (mostly silver), 6% in base metals, and 4% in cash. Would it make more sense to reduce the uranium exposure in favor of silver? Gold? Industrials? The dilemma of course is that uranium has the potential to outperform everything else, so why should I settle for second best? Take a look at the uranium price chart on the right hand side of the screen (updated weekly) – does it look like it’s in a down-trend? Nope.

I want to hear your thoughts, so please post your comments at the bottom of this post, or start a new category on the Buy High Sell Higher Forum. To quote Robert Burns again, “Dare to be honest and fear no labor”, meaning I have some work to do to get back into the plus column. All suggestions will be appreciated.