The Dines Letter 2011 Annual Forecast Issue

by JDH on January 15, 2011

Welcome to the most popular post I will write this year: my annual post about The Dines Letter Annual Forecast. My post last year titled, appropriately enough, The Dines Letter 2010 Annual Forecast Issue, was the most read post on this blog last year, read by almost three times as many people as those who read the second most popular post, Doug Casey, and Casey Research: A Comparison to The Dines Letter. (And yes, the third most popular post also mentioned Mr. Dines). Why the interest in Mr. Dines on this blog?

The obvious reason is that when you go to Google and do a search for “The Dines Letter” this blog ranks second only to Mr. Dines’ website itself.

The almost-as-obvious reason is that James Dines is a polarizing figure. He has a large number of supporters who believe he is the greatest thing since sliced bread, and there are also a large number of people who don’t think highly of him at all.

As for me, I’m somewhere in the middle.

On the positive side, I do believe Mr. Dines is adept at identifying new trends. He constantly pats himself on the back for being the “Original Gold Bug” (he even wrote a book about it), and the Original Silver, Internet, Uranium and Rare Earth Bug. And yes, I agree, he was early to the party in each of those “manias”, and he no doubt made his subscribers lots of money.

I don’t want to quibble, but Mr. Dines was not the first advisor to recommend gold, or anything else. There are lots of other prognosticators who share similar views. However, it is true, Mr. Dines does have an impressive track record of identifying trends early.

My complaint is not with his handling of the start of a trend; my objections are with how he handles the end of a trend. You only make a profit when you sell, and “sell” recommendations are few and far between in The Dines Letter. Long-time readers of this blog will remember my epic evisceration of Mr. Dines on this topic in my post back on July 26, 2008 (and for the record, all posts are forever available in the archives):

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.

My thoughts back in 2008 are the same as my thoughts today. Buying PNP.TO – Pinetree Capital Ltd. around 80 cents in November, 2005 was a brilliant recommendation. As the chart shows, Pinetree had broken out of a consolidation phase, and was on the move:

Pinetree continued to run, all the way to around $16 by the start of 2007, but that was it, and from there it was all downhill, to the bottom, two years later, below where Mr. Dines had recommended it. Knowing when to buy is important; knowing when to sell is also critical.

Now, in fairness, Mr. Dines does state repeatedly that you have to decide for yourself when to sell. He recommends taking a portion of your profits at pre-determined limits. For example, you may decide that with each 10% increase in the share price, you will sell 10% of your shares to lock in your profit. That’s fine, and that’s a prudent approach. However, that also means that you are giving up some of the profit, so it’s not fair to look back and say “I made 2,000%” if most or all of the shares were sold long before that time.

So what does he say of interest in his 2011 Annual Forecast Issue? A lot of the same stuff he has said in previous issues. Not surprisingly he likes gold, silver, uranium and rare earths. He also spends some time on “big picture” trends, like this one:

As we study the situation, our Flashforward is clear that there is a new form of “capitalism” ahead. In “The Coming New Social Order” we envision, when some nations come to their senses, mines will be sold but owners will keep an interest in subsequent production. In other words, sell a silver mine, but a percentage of future production payable in silver from that mine would be part of the price paid.

Hey, Jim, have you ever heard of SLW.TO – Silver Wheaton Corp.? Here’s a quote, from the Silver Wheaton website:

Established in 2004, Silver Wheaton has quickly positioned itself as the largest metals streaming company in the world. The company currently has fourteen silver purchase agreements and two precious metals agreements where, in exchange for an upfront payment, it has the right to purchase all or a portion of the silver production, at a low fixed cost, from high-quality mines located in politically stable regions.

Forecast 2010 production, based upon the company’s current agreements, is 22.0 million ounces of silver and 28,000 ounces of gold, for total production of 23.5 million silver equivalent ounces. By 2013, annual production is anticipated to increase significantly to approximately 40 million silver equivalent ounces. No ongoing capital expenditures are required to generate this growth and Silver Wheaton does not hedge its silver production.

So, in other words, Silver Wheaton invests in mines and receives payment, in silver, out of future production. So, Mr. Dines is predicting a brave new world that actually started in 2004. Nothing like getting out in front of the parade, eh?

Does this mean that Silver Wheaton will become a Dines Letter recommendation at some point in the future? Stay tuned…..

Another section in the 2011 Annual Forecast Letter is a “Manifesto of What was Learned From Uranium’s ’08 Crash”. His main point is that you have to ride out the highs and the lows, because no-one ever sells at the top, or buys at the bottom.

That’s true, but here’s a caveat that Mr. Dines needs to explain to his readers more explicitly: the time from the top to the bottom back up to the top again can be many, many years. You can see the Pintetree example above, or you can look at a stock like PDN.TO – Paladin Resources Limited .

From a low of below $1 in mid 2005, Paladin hit $10 in mid 2007. That was a great win. But, if you kept an “iron hand on the tiller”, and didn’t sell, you watched in drop all the way back to the $1.50 range in the crash of October 2008. Yes, it’s true, Paladin is now half of the way back, closing at $5.33 on Friday, but if you had bought at the peak three years ago you have still lost half of your money.

And that, in summary, is my main “beef” with Mr. Dines. He is great at identifying trends, and he is great at buying low, but he won’t tell you when to sell. With him, you must assume a stock will stay on his lists virtually forever. Perhaps I’m exaggerating, but of the 48 stocks currently on his recommended lists, 31 have been held since before the October 2008 crash. If you take out five of his Rare Earth picks from 2009 and 2010, the list is 31 out of 43 stocks, or 72%.

I guess if 72% of his picks are multi-year holds, there’s no need to read The Dines Letter every three weeks, and there is no need to subscribe to his Interim Warning Bulletin, because nothing much will change. And you know what? That’s fine.

The goal of any investment advisor is to make money for his clients. Over the years Mr. Dines has made a lot of money for his subscribers. Like most advisors he missed the 2008 crash, and that cost his subscribers a lot of money, but that’s the way it goes, unfortunately. No-one is right all the time, or even close to all of the time.

If you want to follow Mr. Dines’s advice, my advice to you is this:

First, read his letters, and understand the “big picture” he is painting. He is good at spotting big trends. Your job is to decide if you agree with his assessment of the trend.

Second, ignore all of the hyperbole and self-glossing he does. He has a big ego (as do most of us); just ignore the ego part.

Third, when you buy a stock, pick your sell points. Most investor’s goal is to make as much money as possible. That’s the wrong goal. The goal should be to get to a risk free position as soon as possible. So, if you “get lucky” and a stock doubles, and if you think the stock still has room to grow, sell half of your position and take your original investment off the table. You then have no risk, and still get to share in the upside. Each time it doubles, sell another half of your position. Then, when the inevitable crash happens, you are playing with house money, so the loss is not as damaging.

I’ll leave the comments section on this post open for you to comment, and of course you can comment on the Dines section on the Buy High Sell Higher Forum as well.

The Week Ahead

I’ve said enough for today, although I could write a few thousand more words on the correction we are enduring in the precious metals markets at the moment. I believe it’s temporary, so I’ve been buying this week. Apparently punter, over on the Forum, agrees with that approach:

We should see the super cycle re-issue a bellow in the new year. I’m loading up on every metal and mining stock there is and strapping a rocket to my ass because I see the Chinese coming down the street with a blowtorch to light my ass on fire.

Probably not the words I would have used, but the metaphor is apt; get ready for a rocket ride!

Thanks for reading, and see you next week.

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