Consider the following hypothetical scenario and typical investor
conundrum:
The price of precious metals is grinding higher, catching the attention of
new investors to the sector. The price of silver and gold are well above
their 50 and 200 day moving averages and many of these new investors seek
opinions on how to proceed. Notice that most commentators are bullish, and
price movements do not appear to have reached extreme levels in comparison to
past price movements. But now what do you do? If an investor buys in now they
risk a drop in the currently advancing price but if they wait they risk
missing out on the next let up.
This is a scenario that we believe is similar to today's situation.
It is our belief that if investing is too complicated the probability of
success diminishes greatly. Too many investors seem to search for the easy,
'can't lose' secret that will guarantee instant success, but those who
understand markets understand that such a perfect solution does not exist.
There is no easy answer to the above scenario but our approach would be to
analyze the situation in an effort to find the simplest solution. The
following is not investment advice as we are not certified investment
advisors and we do not know your specific situation, but rather it is an
explanation of our opinion regarding the preceding scenario.
We believe investors are by far their own biggest enemy. Fear and greed
seem to take over most of their decision making, and when faced with a
scenario such as the one above, the fear of "missing out" is often
overwhelming. It is true that an investor could miss out on a big opportunity
if they do not move quickly but at the same time they could also risk a lot
of capital.
Currently we are extremely bullish on silver and gold as we have been for
many years, but we are not planning on adding to new bullion positions at
this time. Why? We think many investors misinterpret a general statement of
"being bullish" for meaning that prices will continue higher from
the exact moment of receiving the comment until the ultimate expected high.
If prices do not instantly head higher from the time of purchase many
investors becomes scared, frustrated or impatient and sometimes sell before
that next move higher does in fact begin.
We believe this is the one of the biggest flaws of the average investors'
strategy. It is true that from time to time "mega parabolic price
spikes" can shoot a particular investment into the stratosphere and
anyone not with a previously invested position will miss out. But as a
general rule markets move up and down as investors become over enthusiastic
and over pessimistic. We try not to get caught up in the excitement of
trading and chasing the market higher. Basically we like to average into
positions when markets are not exciting and average out of markets when they
are exciting.
Are we bullish on the price of silver and gold? Absolutely. Our portfolio
is positioned to benefit from a positive rise in the price of precious
metals. It is possible that short term prices may head higher but we are not
adding to positions at these levels as we believe that in the short term this
may be a risky move.
Prices have moved very quickly since August of 2007. They appear to have
made a very strong move but the reality is that it has taken six months to
happen. Interestingly, it seems as though most investors will note such a
positive price movement and expect similar performance over the next week or
two. Should they not get their expected price move, they once again become
frustrated and impatient. This is an emotional hurdle that investors must
learn to overcome.
In the long term we believe prices are heading much higher and we are
therefore looking for pessimism in the precious metals market before adding
to our positions. We sell into extreme optimism. We understand that we could
miss out on an opportunity to have more invested for a short term move
higher, and we are willing to risk losing that opportunity. Rather than
trying to catch up to the current markets move we try to anticipate the next
markets move.
We try to take positions when most others are not and sell when most
others are not. If you are interested in learning about how we do so, we
recommend you visit our website at www.investmentscore.com.
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