Stink Bids – Not So Stinky

by JDH on March 8, 2014

When you invest in volatile markets, like junior mining and exploration companies, volatility is a constant.  The trick, of course, is to make volatility your friend.  That’s why I have two strategies:

  1. Use stink bids
  2. Take profits

A stink bid is simply an order to purchase a stock at a price below the current market price.  For example, I own FNV.TO – Franco-Nevada Corp., and I would like to increase my holdings, but I’m not in a panic to do so, so I’ve placed a bid to purchase more shares at $54 (Canadian).  As the commercial says, I “set it and forget it”.  I place my order and let it sit there for 30 days.  At the end of the month if my order wasn’t filled, I re-evaluate the stock, decide if I do want to buy more, and if the price requires adjustment I adjust and re-place my order.

Simple.

Franco Nevada closed down 76 cents on Friday to close at $56.26, so it will take a drop of another $2.26 to get into my buy zone, but that’s fine.  If we have market weakness, I buy more, cheaply.  If the market rockets higher, that’s fine too, I already have a position, so I win.

Of course you don’t make any money until you sell, so it’s important to take profits when you can, but when?  In a perfect world you want to sell “at the top”, but you have no way of knowing when the top is, except in hindsight, so what do you do?

The answer is: you make a plan.

For example, if I am waiting for news, such as drill results or a take over bid, I could wait for the news and sell some or all of my holdings, regardless of price.  That’s an “event based” sell.

Alternatively, I could set a price target, and when it’s reached I could sell some or all of my holdings.

James Dines of The Dines Letter (haven’t talked about him in a while, have we?), suggests targets such as selling 10% of your holdings for every 10% increase in price, or some similar formula.  With the volatility of junior stocks you can do 10% in one day, so that might be a bit too “high frequency” trading, which only generates commissions for your broker.

Doug Casey of Casey Research suggests the “Casey Free Ride” formula, where you sell half of your holdings on a double, so that the balance of your holdings are at zero cost, and therefore risk free.  If the stock turns out to be a ten bagger you have left a lot of money on the table, but that is mitigated by the zero risk once you have recovered your initial investment.

My approach is a somewhere in the middle.  If we have had a few good days I may do a covered write, to lock in some profits but retain my holdings.  This works well for dividend paying stocks, since I continue to earn the dividend.

If a stock increases by 50% I may sell half of my holdings, but only if I have something better to do with the money.  If I think the stock will continue to increase, there is no point in leaving the money to sit in cash.

I have lots of stink bids out there, but I also have some above market sell orders placed, so I’m covered either way, and I don’t have to watch the markets every hour, or even every day.

Set it an forget it.

Works for me.

Thanks for reading; see you next week.