After closing out our first trade with a 66% profit, we are now invested in Silvercorp Mining (SVM). We believe these shares will double by the end of the year. We still like Minefinders, but Silvercorp Mining is a screaming value after short sellers said Silvercorp had fraudulent books. This spooked investors and gave us this great buying opportunity.
Sept 02, 2011 Sale: 2,800 shares of Minefinders (MFN) X 17.46 = $48,888 Oct. 16, 2009 Buy: 2,800 shares of Minefinders (MFN) X $10.39 = $29,092
PROFIT ON TRADE........................................................$19,796
Starting Balance, Oct. 16, 2009...................$30,000 Profit on First Trade, Minefinders.................19,796
New Balance.........................................$49,796
SECOND TRADE - SVM - Silvercorp Metals
Sept 02, 2011 Buy: 6,600 shares of SVM at $7.53 a share = $49,698
So far on this blog we have praised Minefinders - MFN (which gave us a good reward) and panned Silver Falcon Mining Company - SFMI. We made a 66% profit on Minefinders while we watched SFMI go into the hole. There is just no way SFMI will make money with its onerous lease of a million dollars a year. Thats reflected in the depressed stock price.
As bad as SFMI is, SVM (Silvercorp Metals) is a super buy now. Short sellers are claiming the books are cooked and there is a 1.3 billion dollar financial fraud. This spooked investors but for those in the know, these short sellers have given us a gift of a low entry price. Silvercorp Metals biggest balance sheet item is cash and that is easy to confirm in an audit. Here is a mining stock that pays a dividend, has positive cash flow and earnings and has one of the best executive teams in the business. SVM IS A SCREAMING BUY NOW BECAUSE OF SOME SHORT SELLERS WHO ARE LIEING ABOUT THE COMPANY'S POSITION. WHAT A GREAT OPPORTUNITY. WE ARE PREDICTING THIS STOCK WILL DOUBLE BY THE END OF THE YEAR. THIS IS ONLY OUR SECOND BUY IN TWO YEARS AFTER BOOKING A 66% PROFIT ON OUR FIRST TRADE OF MFN. WE LOVE SVM AND THEY ARE NOT A FRAUD OR AN SFMI. WHEN THIS STOCK MOVES UP, LOOK FOR A BIG MOVE AND SOON.
HOW DOES SILVERCORP MINE SILVER AT A NEGATIVE CASH COST? Silvercorp’s Ying mine is one of the richest silver-lead-zinc mines in the world. In addition to silver, the mine produces a large quantity of lead and zinc as by-products (53 million pounds of lead and 13 million pounds of zinc in FY2009). In fact, just under half of the company’s revenues is made up from the sale of these by-products. Due to the low cost jurisdiction in which Silvercorp operates, the money made from the sale of its lead and zinc by-products not only covers the entire cost of mining each tonne of ore but also produces a small profit. When this profit is applied to the cost of mining silver, we arrive at a negative cash cost. Essentially, Silvercorp is paid to mine out its silver.
Bullet points or why Silvercorp Metals is even better than Minefinders now:
- $230.5 million in cash (US Dollars)
- no long-term debt
- lowest production costs among its global industry peers
- pays a dividend
- is profitable
- good management
- unique buying opportunity now because of a short seller claiming SVM has committed financial fraud. This is a bogus claim to drive down the price of the stock, so the shorts can cover their position at a profit.
- Management is scheduled at two upcoming mining shows this month (Sept 2011). Look for a lot of interest in SVM now that its in the news. More people are going to jump aboard when they find out this is the real deal. Its amazing, gold stocks in general have lagged the physical metal, and then this phony fraud story. Great entry point here. Gold traditionally does well in the fall and look to the stocks to catch up to the metal. This spells a double for SVM.
- Unlike gold, silver is actually consumed. One of the biggest customers for SVM silver and other minerals mined in China is the Chinese makers of batteries and other products. SVM is already in the country.
- With the huge short position and upcoming gold shows, look for explosive moves upwards in SVM in the next two weeks. We are very impressed with managements response to this attack by autonomous parties. The gold-shows could not come at a better time to get the truth out. SVM is a beautiful story and its all real!
- The CFO (she is a CPA and CA) just made an $80,000 stock purchase at these low prices. So did one of the directors, one who has a geology background.
I believe Silvercorp Metals has one of the best CEO's in the business, Canadian Rui Feng is a geologist and a superb miner. In the recent criminal short squeeze attempt, Doctor Feng and his team were impressive in responding to the false charges.
Silvercorp is participating in the following conferences during fall 2011:
-- September 11-13 - Rodman & Renshaw, Global Investment Conference, New York -- September 18-21 - Denver Gold Forum -- October 20-21 - The Silver Summit, Spokane, Washington -- October 26-29 - New Orleans Investment Conference -- November 4-5 - Internationale Edelmetall & Rohstoffmesse, Munich, Germany -- November 27-28 - San Francisco Hard Assets Conference
Our model portfolio of around $30,000 purchased 2,800 shares of Minefinders (MFN) last Friday at a cost of $10.36 near the close. Our goal with each purchase is to achieve at least a double. Minefinders just started production in February of this year and is extremely undervalued in the marketplace. Their lifetime cash costs at their Dolores Mine will be around $300 per ounce of gold equivalent. The Dolores Mine shows reserves of 2.4 million ounces of gold and 126 million ounces of silver (per the Minefinders September 10, 2009 presentation at the Rodman and Renshaw conference). This company is turning into a cash flow machine rapidly paying off their debt. They have other mining properties that they have yet to develop. Their minable reserves in the ground are only valued at a third of what a bigger mining company reserves would be valued at. The analysts are just discovering Minefinders and so far they are positive. The stock appears undervalued because of problems with the Dolores Mine startup. But the mine operation is now ramping up very nicely, with future surprises after the third quarter of this year likely to be positive.
Our position at the end of the trading day: 2,800 share of Minefinders (MFN) X $10.39 = $29,092.00 plus other and cash of $987.10 for a total in our model portfolio of $30,079.10.
In 1980 one ounce of gold would buy the Dow for $850. The Dow was at 850, gold was $850 an ounce. We could see gold and Dow parity again, perhaps at the 5,000 number. The place to be in the future is gold and silver and oil. The dollar is going down and will be replaced as the reserve currency. Residential real estate in the US topped out in 2006 and the stock market topped out in 2007. The commercial real estate market may be the next to fall. 125,000 retail stores may be closing in 2009, creating more unemployment. The G20 countries have pumped a lot of liquidity in the system, but the employment picture is still bad. But for people with money to invest, what do you do now?
Our bet is on one of the most undervalued and safe junior mining companies, Minefinders (MFN). Minefinders operates the Dolores Mine in Mexico. Commercial production started this year and the start up bugs are being worked out. Minefinders recently had a stock offering to pay some debt down and build a mill that will result in higher production. They have no need now to go into the credit market for financing or to issue new stock. Their financing is in place, and they do not hedge production. Their large trucks and equipment are brand new. Minefinders is an open pit mine that stacks crushed ore on leach pads that are sprinkled with cyanide. Their recovery rates look good and there does not seem to be any major problems with the ore pads. Dolores has a mine life of at least 15 years, but probably much longer as additional reserves are defined and mined out. The Dolores Mine shows reserves of 2.4 million ounces of gold and 126 million ounces of silver (per the Minefinders September 10, 2009 presentation at the Rodman and Renshaw conference).
We like their Dolores deposit. Many mines are just liars standing over an open hole. An investor has to be very wary of buying any junior miners. If you get the urge to buy a penny mining stock, its best to lay down and hope the urge passes. But Minefinders is the real deal. We believe the only surprises now will be good ones. Their Dolores Mine could make them an attractive takeover candidate. Today's closing price of MFN at $10.39 is a very attractive price. We believe at today's prices MFN is worth $18. If gold shoots up to $1,325 an ounce, MFN could be trading easily at over $20 by the end of this year. If gold and silver prices go up as much as we think, MFN may go to $50 a share perhaps as early as the end of 2010.
If the stock market keeps climbing and does not crash, Minefinders will keep up with the market. But if the market does crash in the next month, it should still go up and do well in a bear market. The underlying economy has severe problems. We may see the stock market return to the market lows we saw in April, perhaps even a down day of over 1,000 points. Whatever the stock market does MFN will do well. The dollar will keep declining and gold and silver prices will go up much higher than they are now. We are buying a company which is substantially undervalued compared to a major gold producer. This is a company that will be in positive cash flow with their peso denominated cost per ounce going down over time while their revenue per ounce should be dramatically going up.
While most stocks are now fundamentally overvalued, MFN is substantially undervalued. We will be seeing a flood of investors seeking the safety and security of the gold mining stocks in the near future. MFN is largely unknown by the investment public. Its not widely followed by the security analysts. That is rapidly changing, today, CIBC started covering this stock at Sector Outperform with a Canadian $15 target. But once this company gets discovered in the coming gold and silver mining boom, look out. We know the FED has supplied so many dollars to the system that the dollar will keep going down. We have heard several respected investors, economists and mine operators calling for $5,000 an ounce gold in five years. The Dolores Mine will still be a young mine then. With operating costs at well under $1,000 an ounce (Mexican peso will go up to the dollar) Dolores will be a cash flow machine. In that scenario, MFN will easily be a $100 stock in five years, protecting your investment capital from the ravages of a declining stock market and a devalued dollar.
Bullet points on why Minefinders (MFN) is the most undervalued small-cap mining/exploration company:
* We think gold and silver prices will continue to go up from here and since Minefinders is in production it will impact their bottom line immediately.
* Minefinders is very undervalued on the basis of gold and silver in the ground compared to other mines, owned by larger mining companies. Minefinders is traded at $100 an ounce for its proven and probable reserves in the ground while the average company has a valuation of $300 an ounce for its proven and probable reserves in the ground.
* The cost per ounce will come down as they are able to get into the higher grade ores now because the village has been relocated that was just below where the high ore grade is and as they reach steady state recovery rates. Also, some one time costs will disappear. Life of mine cash costs are estimated to be $300 an ounce.
* They have other properties and prospects in Mexico and after working there 15 years are developing an expertise in Mexico.
* They do not hedge their production, any gains in gold and silver prices will go directly to the bottom line.
* They are an attractive take over candidate.
* They have new equipment, specially designed for the Dolores site, which should keep breakdowns to a minimum.
* They are already in positive cash flow, and should show a profit in the third quarter of this year. Their 10 million dollar loan has been paid off and they are now paying down their 50 million credit line. They are trying to get debt free ASAP and then become a debt free company.
* There is no more need to issue stock or obtain debt financing. Therefore there should be no dilution going forward.
* They are practicing good mining methods. We believe they may have higher recovery rates than they have forecast on their leach pads, which would have a large impact on the bottomline. Their ore appears to be very amenable to heap leaching. The true recovery rate for gold and the slower leaching silver will not be known for some time.
* With positive cash flow and Dolores maturing in the coming years, they will be able to buy properties in Mexico that other juniors may not be able to finance and that the majors may deem to small a mine property.
* Because of delays with village relocation and the road blockage, the need to mine low grade ore at the beginning of the year, one of the screens being a lemon, projected costs per ounce turning out to be way to low for the first 2 quarters of 2009 and other problems some people perceive management as being inept. There are problems with any mine start up, and Minefinders is no exception. We believe the 3rd quarter numbers may fall short of expectations, but the 4th quarter numbers will be better than people expect. We think we finally can make a fair evaluation of the company. We believe the surprises forward will be good ones and that the share price is very undervalued.
What World of Wallstreet had to say about Minefinders:
"Minefinders (MFL.TO, MFN) is a Mexican heap-leach that is just shifting into production. As such, it is subject to startup problem risk. This could be what has been affecting its stock price recently. In contrast to most heap-leach miners, Minefinders has a significant amount of silver production. All of the metrics are based on gold-equivalent oz where one silver oz is valued at 1/80th of an oz of gold. I expect Minefinders to move into production relatively smoothly. One of the things I like about Minefinders is that its relatively liquid (e.g. today it traded roughly 2 million shares across the AMEX and TSX for a total of 10 million $ of trading). Another thing I like is that it usually trades with a high beta to the price of gold. As such, I consider it to be an undervalued trading vehicle. Right now its being sold off. This either indicates as yet unannounced startup problems or some big leveraged holder(s) that are dumping to raise capital as the general market tanks. This stock is publically supported by Jim Puplava and John Doody, two widely followed gold market commentators. At this point I have a small trading position (still above water) and expect I'll liquidate it either after it turns back up or when I turn less bullish short-term on gold. Minefinders is cheaper relative to the previous two stocks, but this makes sense given the startup risk. Minefinders has recently raised money that it expects to use to purchase another project to take into production. As such, one might want to be looking for a Mexican heap-leach project with a couple of million oz in the ground to invest in as a Minefinders takeover target. "
Why is the Silver Falcon Mining company one of the worst stock investments of all time? Its simple, the Lease.
Now Goldcorp Holdings, the company that owns the War Eagle Mountain in Idaho, values that property on their audited balance sheet at $360,000 which to us sounds like a fair value .
Both Goldcorp Holdings and Silver Falcon are managed by the same person.
Now what does the lease require from Silver Falcon? and why does the lease make SFMI The Worst Mining Investment of All Time?
Once Silver Falcon is in production, SFMI has to pay Goldcorp 15% of the minerals produced BEFORE any expenses for production are paid out. Now SFMI has only 85% of their production to pay expenses. In addition now to their production expenses, they have to pay Goldcorp a monthly lease payment of $83,333.33 (this on a $360,000 property!) and they have to pay them $10,000 a month so Goldcorp can audit the production. Why does SFMI have to pay Goldcorp a monthly fee for auditing, they are managed by the same people! Here is part of the lease:
4. Rent. The annual rent for the premises is $1,000,000, which will be payable in twelve equal monthly installments of $83,333.33 commencing on April 1, 2008 and continuing on the first day of each calendar month thereafter during the term of this Lease; provided that Lessee shall have the right to extend the commencement date of the payment of annual rent until July 1, 2009, and if the Lessee exercises that option, the term of this Lease shall extended for an equal number of months. Rent shall be paid to the Lessor at such address as Lessor may designate in writing.
5. Royalty. In addition to the annual rent, Lessee shall the Lessor a royalty equal to 15% of all minerals produced from the premises during the term of this Lease. The royalty shall be calculated on the amount of marketable minerals derived from ore produced from the premises, as determined after the ore is smelted and after the smelter’s fee is deducted, regardless whether the smelter is paid by taking a share of the smelted minerals or by some other fee arrangement. The Lessee agrees to pay the Lessor a nonaccountable fee of $10,000 during any month that mineral ore is produced from the premises to reimburse Lessor for the cost of auditing the production of mineral ore and refined minerals from the premises.
Here is a beautiful provision. When SFMI wants to extend the lease, they have to tell Goldcorp and send them an additional one million dollars, unreal!, this on a $360,000 property:
2 Term. This Lease shall expire on April 1, 2023. Lessee shall have the option to extend this Lease for an additional five year term, provided however that Lessee is not then in default under the terms of this Lease and Lessee pays Lessor a lease extension fee of $1,000,000. In order to extend the term of this Lease, Lessee must notify Lessor of Lessee’s intention to extend the term of this Lease in writing at least ninety (90) days prior to the expiration date of the Lease, accompanied by payment of the lease extension fee.
Check out the signature page from the the Lease. The CEO of both companies are the same person, Pierre Quilliam. Click on the company names below on the signature page to verify this. I bet those were some tough negotiations. Who represented the Silver Falcon Mining shareholders?
"On October 11, 2007, we entered into a lease agreement with Silver Falcon Mining, Inc., under which we leased our owned and leased acreage on War Eagle Mountain, Idaho to Silver Falcon. Silver Falcon is responsible for all mining activities on our land, and we are entitled to lease payments of $1,000,000 per year, payable monthly, a nonaccountable expense reimbursement in the amount of $10,000 for any month in which ore is mined from the property, and a royalty of 15% from any proceeds payable to Silver Falcon by the smelter of ore produced from land. Pierre Quilliam, our chairman and chief executive officer, is also the chairman and chief executive officer of Silver Falcon."
The reason this is the worst mining investment of all time, is that I know of NO small mine that could be profitable with this lease arrangement. NOT ONE!
But eliminate the $1,000,000 annual lease payment and the $10,000 monthly expense fee and just charge the 15% royalty then this mine has a chance. The creditors need to be paid off and the Silver Falcon shareholders deserve to be looked out for by the Silver Falcon management.
One sign we have gone crazy with precious metals speculation, is small miner Silver Falcon Mining (SFMI) share price has more than quadrupled the last few days but Silver Falcon has going concern issues raised by their auditors. This tells me this gold and silver market has just reached a dangerous speculative phase.
From a recently filed Silver Falcon Mining (SFMI) SEC Report (info from the company): "Our balance sheet as of June 30, 2009 reflects cash of $83, current assets of $176,378, current liabilities of $1,249,092, and a working capital deficit of ($1,072,714).
We reported net losses during the years ended December 31, 2008 and 2007 of ($3,399,970) and ($1,282,437), respectively.
At this time, we have no revenues. We do not expect to begin generating revenues until we commence actual mining operations, which is not expected to occur until October 2009. Until we begin receiving revenues from mining operations, we are dependent on the deferral of salaries by our management, and loans from our officers and a significant shareholder to pay other administrative expenses. We plan to continue raising capital through the issuance of convertible notes, and we believe we have sufficient interest from investors to raise the capital we need to commence operations. We also plan to continue funding our development by issuing shares to acquire services that we need to commence operations.
Our financial statements have been presented on the basis that we continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, we incurred a net operating loss in the years ended December 31, 2008 and 2007, and the six months ended June 30, 2009, and have no revenues at this time. These factors create an uncertainty about our ability to continue as a going concern. We are currently trying to raise capital through a private offering of preferred stock. Our ability to continue as a going concern is dependent on the success of this plan. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
On October 11, 2007, we entered into a lease agreement with Goldcorp, under which we leased its mineral rights on War Eagle Mountain. Under the lease, we are responsible for all mining activities on War Eagle Mountain, and we are obligated to pay Goldcorp annual lease payments of $1,000,000, payable on a monthly basis, a monthly non-accountable expense reimbursement of $10,000 during any month in which ore is mined from the leased premises, and a royalty of 15% of all amounts we receive from the processing of ore mined from the properties. The lease provides that lease payments must commence April 1, 2008, but that we may extend the commencement date to July 1, 2009, in which event the lease term will be extended by an equal amount of time." (OUR NOTE: Goldcorp is owned by the present management of Silver Falcon Mining)
This is what the auditors said in their report on their last audited financial:
"As discussed in Note 12 of the notes to the accompanying financial statements, the financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the footnotes, the Company does not currently have any revenue is dependent on the deferral of salaries and loans from management and a shareholder to pay operating expenses. Those conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 12 – GOING CONCERN
These financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. However, the Company has incurred net losses of ($3,399,970) and ($1,282,437) for the years ended December 31, 2008 and 2007, respectively. The Company has remained in business primarily through the deferral of salaries by management, loans from the Company’s chief executive officer, and loans from a significant shareholder. The Company intends on financing its future development activities from the same sources, until such time that funds provided by operations are sufficient to fund working capital requirements. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time."
We have been following the free Bamtrader and Baminvestor tweets the last few days. Talk about being out of synch with the markets. This is where they stand on the following investments per their Baminvestor blog. This is based on their BAM Model (BAM stands for Behavioral Analysis of Markets):
Being bearish gold, oil, stocks and long the dollar does not seem too bright to us as short term trading ideas. The say in their blog they might be out on a limb, hey, someone tell them the tree surgeon just showed up.
Now we were prepared to make some comments on their trading tweets today, but if you go to Bamtrader now it says the following: This person has protected their tweets. Shortly after the close today, their trading tweets disappear. This is not a good sign. There was an indication a lot of their subscribers had thrown in the towel today. If they don't want their tweets made public today to people who have not read them, we will play along. Lets just say the BAM Model (or the traders version of the HAL 2000) sucks the big one for trading. Go short stocks, gold, crude oil and go long the dollar. The reversals they saw today seemed to go the other way. It was pure disaster and devastation. Burn and bury those tweets where no one can find them.
Will there be a crash by Friday of this week per the BAM Model?:
Latest from the Elliot Wave Guru, Robert Prechter:
Investing can be tough. You just got to wait for the right opportunity and catch the big wave:
Rather than lose your money with the Bamtrader tweets (that disappear later in the day), why not call this guy, the Bookie Basher, and put your trading money on a ball game. You at least got a chance to almost double your money in a few hours, watch some cheerleaders and drink beer with your buddies at your local sports bar (only do this ifs its legal in your area). Best of all, at the end of the night you are out of your position. Oh, by the way, he had the Vikings on Monday night - a winner!:
BAM UPDATE (October 14, 2009) - They are still looking for a 22% decline in the stock market in October:
Whats your experience been with BAM or the Bookie Basher or anything else you want to say. Please feel free to leave a comment. Just click on "comments" below.
UPDATE (October 4, 2009): Below, in this blog post, we are talking about buying Minefinders around October 7 as that would be the new low of the current cycle for MFN. We might still do that. But because October is traditionally a bad month for stocks and gold stocks in particular we might wait for MFN to go lower, maybe there will be a good buying opportunity in early November. Jack De Veaux at The Weekly JDV Market Timer said today,"We believe that gold should see a $300 rally between now and the Spring - but first we need to take out the March 2008 high around $1030 to put us on target for $1325 or so. We're looking for an inflation scare to roil the markets before the next bout of deflation takes hold. Gold is also a candidate to go parabolic into late in the year based on the "Year 9 of the decade effect" that propels the strongest asset class in the ninth year of the decade." For now we are in 100% cash. If you are not sure of the move, stay in cash. This is what we posted on a message board:
You might be right about the rationalizing. On August 17, 2009 MFN was at 7.99. Now if Minefinders drops down to that level again and bounces up from there, that would be a buy signal in my book. I would call the $7.99 US price a pivot point. But until the stock does that, this is not a buy for me. Gold and silver are near all time highs, but can't seem to break out into new highs. But the end of the year should be positive for gold and silver equities. Minefinders is volatile, I am hoping it will go down some from here, to make a trade. Good luck to all!
ORIGINAL POST:
We are still on target for our model portfolio to move from cash into Minefinders (MFN) on or about October 7, 2009. In the meantime, expect gold and silver shares to be much lower in price a few days from now. For now, cash is king. You want to make money trading stocks? - follow this formula. We are presenting some information below, that if you master it, will put you far ahead of the average trader. Check it out.
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Quotable – A lesson from Jesse Livermore we keep re-learning:
“It was the change in my own attitude toward the game that was of supreme importance to me. It taught me, little by little, the essential difference between betting on fluctuations and anticipating inevitable advances and declines, between gambling and speculating. I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, "Well, you know this is a bull market!" he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend. And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance. “ Jesse Livermore
Today we talk about Jesse Livermore… arguably the greatest traders is history. There is not a single trader on Forbes 400…not one. There are a few speculators, but those guys ran hedge funds. No one has ever started with pocket change and built the fortune Livermore did. He was worth over 200 million in 1929 after the market crashed…many billion dollars adjusted to today. This document is broken into 3 sections. 1) Livermore’s 5 money management rules 2) Quotes from Livermore 3) Comments about Livermore made by Richard Smitten in his book “Jesse Livermore World’s Greatest Stock Trader.”
Part 1 – Livermore’s 5 money management rules. 1) Don’t lose money. Don’t lose your stake. A speculator without cash is like a store-owner with no inventory. Cash is your inventory, your lifeline, and your best friend. Without cash, you are out of business. Don’t lose your line. There is no place in speculating for hoping, for guessing, for fear, for greed, for emotions. The tape tells the truth.
2) Always establish a stop. A successful speculator must set a firm stop before making a trade and must never sustain a loss of more than 10 percent of invested capital. I have also learned that when your broker calls you and tells you he needs more money for a margin requirement on a stock that is declining, tell him to sell out the position. When you buy a stock at 50 and it goes to 45, do not buy more in order to average out your price. The stock has not done what you predicted; that is enough of an indication that your judgment was wrong. Take your losses quickly and get out. Remember, never meet a margin call, and never average losses. Many times I would close out a position before suffering a 10 percent loss. I did this simply because the stock was not acting right from the start. Often my instincts would whisper to me: “J.L., this stock has a malaise, it is a lagging dullard. It just does not feel right,” and I would sell out of my position in the blink of an eye. I absolutely believe that price movement patterns are repeated and appear over and over with slight variations. This is because humans drive the stocks, and human nature never changes. Take your losses quickly. Easy to say, but hard to do.
3) Keep cash in reserve. The successful speculator must always have cash in reserve…for exactly the right moment. There is a never-ending stream of opportunities in the stock market and, if you miss a good opportunity, wait a little while, be patient, and another one will come along. Don’t reach for a trade, all the conditions for a good trade must be on your side. Remember, you do not have to be in the market all the time. The desire to always be in the game is one of the speculator’s greatest hazards. When playing the stock market, there are times when your money should be waiting on the sidelines in cash…waiting to come into play. Time is not money – time is time, and money is money. Often money that is just sitting can later be moved into the right situation at the right time and make a fast fortune. Patience is the key to success, not speed. Time is a cunning speculator’s best friend if it is used wisely.
4) Let the position ride. As long as the stock is behaving normally, do not be in a hurry to take a profit. You must know you are right in your basic judgment, or you would have no profit at all. If there is nothing basically negative, then let it ride. It may grow into a very large profit. As long as the action of the overall market and the stock do not give you cause to worry, have the courage of your convictions, and stay with it. When I was in a profit on a trade, I was never nervous. Of course the opposite is true as well. If I bought a stock and it went against me I would sell it immediately. You can’t stop and try to figure out why a stock is going in the wrong direction. The fact is that it is going in the wrong direction, and that is enough evidence for an experienced speculator to close the trade. I do not and never have blindly bought and held a stock. To buy and hold blindly on the basis that a stock is in great company or a strong industry, or that the economy is generally healthy, is, to me the equivalent of stock market suicide. Stick with the winners. Let them ride until you have a clear reason to sell.
5) Take the profits in cash. I recommend parking 50 percent of the profits from a successful trade, especially when the trade doubled the original capital. Set the money aside, put it in the bank, hold it in reserve, or lock it up in a safe-deposit box. Like winning in the casino, it’s a good idea, now and then to take your winnings off the table and turn them into cash….the single largest regret I have ever had in my financial life was not paying enough attention to this rule. Now our comments… Livermore gets criticized for being a plunger…than means putting most or all him money in the market, but he only added to positions that showed him a profit and he typically started with a 20% position. That means if he wanted 1000 shares, he’d buy 200, and only if that showed him a profit did he take his next 200. So although he has been criticized for putting all his eggs in one basket, he did it responsibly and would exit if the market told him he was wrong. We find it interesting that Livermore started out as a day trader or a very short term trader (in the bucket shops), but when he made a lot of money, he became a swing trader. When you are just starting out, it’s best to trade short term…constantly rolling money from one position to the next, but when you have much larger stake, it’s better to play the bigger swings. Livermore was also criticism as being a great bear, but nothing could be further from the truth. He was a trader…pure and simple. If the market was going up, he’d be long big time. If the market was falling, he’d be short. He made a killing riding the market up during the late 20’s and then made a bigger killing when the market crashed. He was not a bear; he was not a bull; he was a trader willing to go either way. In his own words, there are two types or traders….profitable and not profitable. We found his fifth rule to be interesting. He lost a fortune on numerous occasions, so it’s not surprising that his biggest regret was not putting a little money in a safe place. The market is driven by people and human nature does not change. Although these lessons are from a man who traded over 65 years ago, they are just as relevant today.
Part 2 – Quotes from Livermore:
“…it is what people actually did in the stock market that counted – not what they said they were going to do.” Livermore studied his mistakes objectively…”the only way you get a real education in the market is to invest cash, track your trade, and study your mistakes!” It is emotionally difficult to review you mistakes, since the speculator must wade through his own bad trades and blunders. And these are not simple blunders; these are blunders that cost money. Anyone who has lost money by investing poorly knows how difficult it is to reexamine what occurred. The examination of a losing trade is tortuous but necessary to ensure that it will not happen again. Livermore was brutal in self-analysis. He told his sons his conclusions: “Successful trading is always an emotional battle for the speculator, not an intelligent battle.”…He knew that his biggest enemy was his own emotions. “We are the sum total of our experience.” When asked what makes a good stock speculator, Livermore replied “…it’s an aptitude for the game, a stomach for the ride, and the ability to see what is happening without emotion. The ability to make observations that others don’t and a good memory….Only speculate if you can make it a full-time job. Don’t take tips of any kind, no matter where they come from. Don’t worry about catching tops or bottoms, that’s fools play. Keep the number of stocks you own to a controllable number. It’s hard to herd cats, and it’s hard to track a lot of securities. Take your losses quickly and don’t brood about them. Try to learn from them but mistakes are as inevitable as death. And only make a big move, a real big plunge, when a majority of factors are in your favor….every once in a while you must go to cash, take a break, take a vacation. Don’t try to play the market all the time. It can’t be done, too tough on the emotions.” “The unsuccessful investor is best friends with hope, and hope skips along life’s path hand in hand with greed when it comes to the stock market. Once a stock trade is entered, hope springs to life. It is human nature to be positive, to hope for the best. Hope is an important survival technique. But hope, like its stock market cousins ignorance, greed, and fear, distorts reason. See the stock market only deals in facts, in reality, in reason, and the stock market is never wrong. Traders are wrong. Like the spinning of a roulette wheel, the little black ball tells the final outcome, not greed, fear or hope. The result is objective and final, with no appeal. “I believe that the public wants to be led, to be instructed, to be told what to do. They want reassurance. They will always move en mass, a mob, a herd, a group, because people want the safety of human company. They are afraid to stand alone because they want to be safely included within the herd, not to be the lone calf standing on the desolate, dangerous, wolf-patrolled prairie of contrary opinion.” “First, do not be invested in the market all the time. There are many times when I have been completely in cash, especially when I was unsure of the direction of the market and waiting for a confirmation of the next move....Second, it is the change in the major trend that hurts most speculators.” “The last gasp of heavy volume provides a great opportunity to sell out any illiquid large holdings. I knew it was foolish to ever catch the tops or the bottoms of the moves. It is always better to sell large holdings into an advancing market when there is plenty of volume. The same is true on the short side; you are best to cover the short position after a steep fast decline.” “…the market will often go contrary to what speculators have predicted. At these times, successful speculators must abandon their predictions and follow the action of the market. Prudent speculators never argue with the tape. Markets are never wrong, but opinions often are.” “All through time, people have basically acted the same way in the market as a result of greed, fear, ignorance, and hope. This is why the numerical formations and patterns recur on a constant basis.” “Every stock is like a human being: it has a personality, a distinctive personality. Aggressive, reserved, hyper, high-strung, volatile, boring, direct, logical, predictable, unpredictable. I often studied stocks like I would study people; after a while their reactions to certain circumstances become more predictable.” “I believe that having the discipline to follow your rules is essential. Without specific, clear, and tested rules, speculators do not have any real chance of success. Why? Because speculators without a plan are like a general without a strategy, and therefore without an actionable battle plan. Speculators without a single clear plan can only act and react, act and react, to the slings and arrows of stock market misfortune, until they are defeated.” “If you can’t sleep at night because of your stock market position, then you have gone too far. If this is the case, then sell your position down to the sleeping level.” “I believe that anyone who is intelligent, conscientious, and willing to put in the necessary time can be successful on Wall Street. As long as they realize the market is a business like any other business, they have a good chance to prosper.” “Remember, it [the market] is designed to fool most of the people most of the time.” “…I have always fully understood that I am not the only one who knows that the stock market is the world’s biggest gold mine, sitting at the foot of the island of Manhattan. A gold mine that opens its doors every day and invites anyone and everyone in to plump its depths and leave with wheelbarrows full of gold bars, if they can – and I have done it. The gold mine is there all right, and every day somebody plumps it’s depths, and when the bell rings at the end of the day they have gone from pauper to prince, or gone from prince to supreme potentate, or gone stony broke. And it’s always there waiting.” “I believe that uncontrolled basic emotions are the true and deadly enemy of the speculator; that hope, fear, and greed are always present, sitting on the edge of the psyche, waiting on the sidelines, waiting to jump into the action, plow into the game.” “These words [bullish, bearish] are not in my vocabulary because I believe they can create an emotional mind-set of a specific market direction in a speculator’s mind. “I never try to predict or anticipate. I only try to react to what the market is telling me by its behavior.” “I believe there are no good stocks or bad stocks; there are only money making stocks. So there is no good direction to trade, short or long; there is only the money-making way to trade.” “Greed, fear, impatience, and hope will all fight for mental dominance over the speculator.” “My satisfaction always came from beating the market, solving the puzzle. The money was the reward, but it was not the main reason I loved the market. The stock market is the greatest, most complex puzzle ever invented – and it pays the biggest jackpot….it was never the money that drove me. It was the game, solving the puzzle, beating the market that had confused and confounded the greatest minds in history. For me, that passion, the juice, the exhilaration was in beating the game, a game that was a living dynamic riddle, a conundrum to everyone who speculated on Wall Street.” “Always remember; you can win a horse race, but you can’t beat the races. You can win on a stock, but you cannot beat Wall Street all the time. Nobody can.”
He quickly learned that it was never what the brokers, or the customers, or the newspapers said – the only thing that was important was what the tape said. The tape had a life of its own, and its was the most important life. Its verdict was final. He learned to be interested only in the change in price, not the reason for the change. He had no time to waste trying to rationalize the action of the stock. There could be a million reasons why the price had changed. These reasons would be revealed later, after the fact. He knew that unless he actually purchased a stock, he could never know how he would handle himself. When a trader made a bet everything changed, and he knew it. Then and only then did the trader enter the heated jungle of emotions…fear and greed. You either control them or they control you. He worked alone…never telling anyone what he was doing, never taking on a partner. The trill came from the winning, not the money, though the money was nice. He never blamed the market. It was illogical to get angry at an inanimate object, like a gambler getting mad at a deck of cards. There was no arguing with the tape. The tape was always right; it was the players who were wrong. His first conclusion was that he won when all the factors were in his favor, when he was patient and waited for all the ducks to line up in a row. That led him to his second conclusion, that no one could or should trade the market all the time. There were times when a trader should be out of the market, in cash, waiting. To speculate, a trader had to be a player, not a theorist, or an economist, or an analyst. A speculator had to be a player with money down on the table. It was not the coach or the team’s owner who won the game, it was the players on the field – just as it was not the generals who won the battle, it was the grunts on the ground. You had to lose, because it taught you what not to do…his conclusions were developing from actual trading, from hands-on participation in the market and constant analysis. He never used the words bull market or bear market because these terms tended to make too permanent a psychological mind-set. Livermore was looking for the difference between stock gambling and stock speculation …Livermore’s final conclusion was clear: To anticipate the market is to gamble; to be patient and react only when the market gives the signal is to speculate. The first step was to concentrate on the overall market before making a trade. He would follow the line of least resistance – up in a bull market, buy long, down in a bear market, sell short. If the market went sideways, he would wait in cash for a clear direction to be established…. He would not anticipate the market by guessing its direction….Livermore had come to realize that the big money was in the big swings….It is the big moves that make the big money. Livermore believed that stocks are never too high to begin buying or too low to begin selling short. Livermore believed that there was only one side of the market to avoid. He could be on the bull side or the bear side – it made no difference to Livermore – just as long as he was not on the wrong side. From experience, Livermore knew that one of the hardest things to do as a trader was to sell out a position early if he was wrong on the initial purchase and the stock moved against him. He did not care why things happened in the market, he cared only what happened every day when the market opened.…He observed that the market always did what it wanted to do, not what it was expected to do. Livermore had a steadfast rule that if something serendipitous, an unplanned windfall, should occur, he must capitalize on it and not be greedy – accept his good fortune and close out his position. Livermore loved the fact that in trading the market there was no end to the learning process. The game was never over, and he could never know enough to beat the market all the time. The puzzle could never be solved…he never considered himself a market master. He always considered himself a market student who occasionally traded correctly. Livermore had long ago realized that the stock market was never obvious. It was designed to fool most of the people most of the time. His rules were based on thinking against the grain: cut your losses quickly; let your profits ride unless there’s a good reason to close out the position; the action is with the leading stocks, which change with every new market; new highs are to be bought on breakouts; cheap stocks are often not a bargain, because they have little potential to rise in price. The stock market is a study in cycles. It never goes up forever, nor does it go down forever, but when it changes direction it remains in that new trend until it is stopped. He considered it necessary to act like a poker player in his business, to never tip his hand or to react emotionally. Because of this inability and unwillingness to express his emotions, the stress on him was permanent. Timing was everything to a speculator. It was never if a stock was going to move; it was when a stock was going to move up or down. Livermore always considered time as a real and essential trading element. He often would say it’s not the thinking that makes the money – it’s the sitting and waiting that makes the money….This has been incorrectly interpreted by many people to mean that Livermore would buy a stock and then sit and wait for it to move. This is not so. There were many occasions where Livermore sat and waited in cash, holding little or no stock, until the right situation appeared. He was able to sit and wait patiently in cash until the perfect situation presented itself to him. When conditions came together, when as many of the odds as possible were in his favor, then and only then would he strike. Livermore let the market tell him what to do, he got his clues and his cues from what the market told him. He did not anticipate, he followed the message he received from the tape. It’s scary to think how much money Livermore would make if he traded today…his ability to read the tape when the tape wasn’t even that reliable. He is in our opinion the best ever. Since the market is an extension of human psychology and human emotion and because people don’t change, the market doesn’t change. The players change; the underlying issues change; trading doesn’t change, and that’s why over 60 years after he committed suicide, Livermore’s words of wisdom are still relevant.
Death of Jesse Livermore: Jesse Livermore, 63, died by his own hand on November 28, 1940 via a revolver bullet through the brain. He shot himself in the cloakroom of the Sherry Netherland Hotel in Manhattan. His suicide note to his wife said:
“My dear Nina: Can’t help it. Things have been bad with me. I am tired of fighting. Can’t carry on any longer. This is the only way out. I am unworthy of your love. I am a failure. I am truly sorry, but this is the only way out for me. Love Laurie”.
Although untouchable trusts and cash assets at his death totaled over $5 million, Livermore had failed to regain his trading confidence before his death. A lifelong history of clinical depression had become the dominant factor in his final years.
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Jesse Livermore's Averaging Up Technique, courtesy of Arun Prashanth:
Jesse Livermore is considered to be one of the Greatest Speculators of All-time if not the best. Starting at an early age of 15, Livermore went on to shock the Street with his extraordinary plunges and was once called the “Boy Plunger”. In this post I will explain in detail a strategy he used to cut his losses effectively and let his profits run. The following technique works best for Swing trading and Position trading but it doesn't mean it cant be used for other types of trading.
Averaging down is one of the worst things which can be done in trading. Why would you want to add to a position which is losing? Its blind gambling from that point on. Your just hoping for the prices to come up when in reality your losing and the markets are telling straight on your face that your wrong. In trading, when the markets tell you that your wrong, it is best to accept it and cut your losses as soon as possible and get out immediately. We can never know for sure if the stock will come back. Averaging down maybe a good idea in Value Investing but it is never good while your trading. Remember “Never turn your trade into an Investment”. Now let me come back to the topic in discussion. Averaging up is the same as Averaging down but the only difference is that your doing it in the other direction. And you know your right every time you add to your position. Confirming the fact that you are correct gives you confidence and helps you catch the full trend or at least the major part of it which makes the big money .
As Jesse Livermore said, "And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine - that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance."
The above quote is from Jesse Livermore's book “How to Trade In Stocks” - the book is presented below in its entirety:
Movie on the Crash of 1929 made in the mid nineties:
And now for some fun from the popular Glenn Beck:
Paul Tudor Jones II (from 1987) - Wiki: Paul Tudor Jones II (born September 28, 1954, Memphis, Tennessee) is a well-known hedge fund manager. Having made $750 million in 2006, he is worth an estimated $3.3 billion, and was ranked by Forbes in March 2007 as the 369th richest person in the world:
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