Buying Your Backyard
Stockscores.com Perspectives for the week ending July 1, 2013
In this week's issue:
Upward trend line breaks can be a sign of trend reversal or a pause in the trend, this week Tyler discusses some ways to tell the difference. Plus, the regular weekly analysis. Watch the video on YouTube by clicking here
This Week's Trading Lesson
People tend to buy what they and their social network know. The main industries of a region are often the focus for investors in that area. Vancouver, Canada, is a centre for mining exploration companies, a focus that evolved out of the Vancouver Stock Exchange's function as a hub for raising money for speculative mining deals. Some of the world's biggest mining investment shows are held in Vancouver, so it's not surprising that when I do a presentation in Vancouver the questions I'm asked are almost entirely about mining stocks.
Take a one-hour flight east to Calgary, Canada, and the questions now focus on oil and gas stocks. Calgary is Canada's epicentre of the energy industry; the tall glass towers that make this city's skyline so dramatic are home to many energy company head offices.
You won't find the people in Vancouver and Calgary to be a whole lot different: they speak with the same Canadian accent and are as polite as Canadians are reputed to be. Both cities are wealthy by global standards, and the population of each tends to be more educated than most. Both cities love their respective hockey teams and have hosted successful Winter Olympics: Calgary in 1988 and Vancouver in 2010.
But despite so many similarities, they have a very different focus in their investment approaches. I have met countless Vancouverites and Calgarians who have shown me their portfolios, and it's not uncommon to find that they're 100% invested in the native industry of their city. Most portfolio managers would be shocked to see a person's entire retirement portfolio invested in speculative mining or energy stocks, yet this is not uncommon in these cities. I once met a guy in Vancouver who had shares in over 100 mining stocks and not a single stock outside of that sector.
This lack of diversity can create great fortunes when there's a boom in that industry. I've seen it happen many times. The mining industry enjoyed great success over a number of years as the prices of gold and silver surged to record highs from 2006-2011. I expect that the Mercedes and BMW dealerships enjoyed a lucrative business in Vancouver during those years, funded by penny stock profits.
Mining and energy tend to run in boom-bust cycles making long-term success fleeting. When a sector is hot, it's easy to make money. When it ceases to be the trendy place to invest, these stocks can languish for years with negative returns. During these times, sector-weighted investors struggle through financial and emotional turmoil, watching seven- and eight-figure portfolios shrink to five- or six-figure amounts. I know people who have gone from a net worth of over $20 million to under $1 million in the span of a year when the sector they were invested in went from hot to not. These sorts of trend reversals flood the market with slightly used Mercedeses and BMWs.
In a hot market, everyone's an expert. A person who knows a little bit about oil and gas, enough to pick a few stocks with some decent potential, can make a lot of money. These people don't make money because they have exceptional analytical prowess, but simply because they rode a hot market. When the trend reverses, they go back to looking like neophytes. Even the most knowledgeable of sector investors look dumb when the trend is down. Profits in these markets are just short-term loans for the person who fails to realize that you have to sell and move on to the next hot market.
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No trades this week, to our Canadian readers, Happy Canada Day. For our American readers, Happy Independence Day!
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References
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Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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