July 26, 2008 – Volatility, Dines and Pinetree

by JDH on July 26, 2008

Ever had one of those weeks where your portfolio did really badly? Me too. This week.

After I started buying last week, the senior gold producers got hammered;

K.TO – Kinross Gold Corp. was down 16.5% on the week, AEM.TO – Agnico-Eagle Mines Ltd. was down 14.6% after disappointing results, and G.TO – Goldcorp Inc. was the star of the bunch, only down 10.9%. I guess I didn’t exactly pick the bottom when I started buying, did I?

Here’s a quote from Bottomfeeder on the Buy High Sell Higher Forum on Thursday:

Picking the bottom is almost impossible.  So you must buy in “pieces of positions”.

I like to look at it as buying in the “U” or turn if you will.  Visualize it.  I may think that its a bottom and buy a partial only to see it drop another 10-20%, then I buy again, maybe it drops another 10% before resuming up, maybe the last buy was the bottom and it heads up.

Either way you have probably ended up with a couple of pretty good entry points on something you want to invest in, especially if you are watching TA and sentiment.

Personally I struggle on the sell side more, not selling enough shares into resistance.  Its really about greed management more than anything else.  I just keep trying to tighten up my discipline and not making changes on sell orders after I have set them.

Anyway, I have caught more than a few “advisors” say that this is the way you have to play the commodities, and to me these stocks are to be played as commodities.  The good news to me is that my goal is to invest not trade, so as long as I sell them higher than I bought them I will do just fine.  But when a nice rip is there I try and take them, again selling partials.


You can’t pick the bottom. You can’t pick the top. So don’t try to time it exactly. Decide what you want to own, and begin accumulating. I have never seen a stock go up for 100 days in a row. They go up, they pull back, then they go up again, and so on. Decide what you want, and buy “pieces of positions”.

Last week I mentioned that I increased my holdings in K.TO – Kinross Gold Corp., G.TO – Goldcorp Inc. and AEM.TO – Agnico-Eagle Mines Ltd. They rose after I bought them, but as I mentioned above, they got hammered this week. I don’t get excited when they go up, and I don’t cry when they pull back; that’s just the way it goes.

Here’s how I think you play it: Let’s assume I’ve decided I want 1,000 shares of Company X in my portfolio. I look at the chart, and if it’s currently trading at the high end of the range, with a relative strength over 70, I won’t buy it now. I’ll wait until we have a down day or two, and then I’ll buy perhaps 300 or 400 shares to establish my initial position. If it falls the day after I buy it, I’ll buy 200 or 300 more shares. If it stabilizes, I hold, but put in some bids at below market prices. Eventually I get to my 1,000 shares. I may even get to 1,200 if conditions look good.

Then, when we have a few strong days and I’m well into the money, and the RSI is up over 70, I start selling. 200 shares today. Perhaps 200 the next day, until it stops advancing.

If Company X is a core holding in my portfolio, I will probably not drop below 500 shares unless I’m ready to sell and get out for good.

What do I do now? Gold got hammered on Tuesday and Wednesday, falling from almost $980 to below $920, before bouncing back on Thursday and Friday to close the week at $936.90. We know gold is volatile, so big drops are buying opportunities, and that’s what I’ll do this week. I’ll continue to increase my core holdings.

Our Friend Mr. Dines

I can’t pass up the opportunity to quote James Dines from yesterday’s The Dines Letter. He spends most of the letter explaining that markets go up and down, so even if markets go down for a few years that’s no reason to sell. Here’s the classic quote:

“Our recommendation of PNP.TO – Pinetree Capital Ltd. at 0.795 cents (Cdn) subsequently rose 1,931% to $16.15 (Cdn) nearly two-thousand percent in only 17 months, such that a $10,000 investment would have risen to $203,145.”

Unfortunately he didn’t finish the thought, which should have gone something like:

“Ever since that peak I have had a Buy recommendation on Pinetree. I even moved it from my speculative list to my “good grade, moderate risk” portfolio. As of today it is trading at $1.82 (Cdn), so if you had followed my advice and bought it at $16.15, you would have lost 89%, such that an investment of $200,000 at that time would be worth $22,538 today.”

Even better, there’s a letter to the editor in this edition from some guy who spends the first 20 lines of his letter praising Mr. Dines, but then asks why one would continue to hold a stock that adds no value to the companies it invests in (Pinetree is basically just a venture capital firm), has no technical indicators to recommend buying, and has no truly great assets.

Dines then spends have a page explaining that yes, some companies go down, but if their investments start paying off, it will go up. He ends with the classic “You have lost nothing if you own the stock and the price fluctuates.”

Yeah, I guess that’s true. But if you had sold a few dollars ago, the money could have been redeployed and earning you money. It’s called opportunity cost, and it is real.

Oh well, I haven’t owned Pinetree for a long time, so it’s all academic to me at this point.

It’s not a profit until you sell, and if Dines had recommended selling after a 2,000% rise he would be hailed as a genius. Holding a stock all the way back down isn’t that impressive.

Enough about Mr. Dines. That’s two weeks in a row we’ve discussed him; it’s probably time to stop mentioning him for a while.

As always, I’ll leave it to you to set the agenda by posting your thoughts on the Buy High Sell Higher Forum. I expect better weeks ahead, so I’m buying the producers at these levels.

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