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Fear and Greed: How they Influence the Junior Mining Stock Market

Written By Brian Hicks

Posted July 2, 2010

There is an old saying on Wall Street…

Stock markets are driven by two emotions: fear and greed.

Of course this is an oversimplification, but it can often be true.

And succumbing to these emotions can have a profound effect on our investment portfolios and overall bottom line.

The legendary investor Warren Buffett has two great quotes regarding fear and greed that apply to the current state of the junior mining stock market.

The first quote goes like this:

Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market.

And the second:

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

Let’s look at Buffet’s first quote with regards to investing in precious metal junior stocks.

The junior mining stock market is very volatile. Junior mining stocks can go up or down 50% in a heartbeat depending on market circumstances, news, seasonal trends, the outcome of drill results, and a number of other things.

Sometimes they seem to go up or down 50% for no reason or all. It can be quite confusing at times, especially for investors who are not used to this kind of volatility.

Yet for the past ten years, there has been no better place to put your money — as far as performance goes — then precious metal junior mining stocks.

This is a simple fact that Wall Street and the main stream media want you to ignore.

It’s true that for the past decade, the junior mining stock market has been largely uneventful for 75% of the time. Yet during the other 25% of that period, junior mining stocks have been rip-roaring, making investors more money than they could have ever imagined.

I have watched the value of my own portfolio during this ten year period have wild swings to the upside and also to the downside.

One of the lessons you learn from these kinds of experiences is to not get too greedy when the market is hot and always remember to take some profits when you can. In other words, get your original investment back into your capital account as soon as opportunity presents itself.

The other lesson is not to panic when your portfolio swings to the downside.

Too many investors hastily step out of good positions when the market is down, even when the value is still there.

We only want to get rid of a company if the value is no longer there, or the reason we bought the company in the first place no longer exists. We don’t want to jump out of good value positions because of fear.

What ultimately protects those of us who are investing in precious metals junior mining stocks is the fact that the long-term trend is on our side, even though most of the investing community hasn’t had a clue for the past ten years as to what is happening in our world and why.

The most important thing to understand in investing is to have a correct concept of the long-term trend. The long-term trend for the precious metals is extremely bullish, as we constantly talk about here in Wealth Daily.2010_june_gold_bars.jpg

Despite the ups and downs, gold recently hit a new record high of $1,266 an ounce. Sure it will correct back a bit before it goes to the next new high; but as I have already accurately predicted for over 12 years now, gold is going higher.

Now the bullish trend for the precious metals is going to go into hyper-drive. And in the coming months we should use any down periods as our schooling moments to better align our portfolios with value companies that will perform extremely well when the time comes.

The long-term trend is that abused fiat currencies will all eventually fail. Gold has moved higher against all fiat currencies for years, and it will continue to move higher because there is nowhere for these abused currencies to ultimately go but lower — despite the ups and downs you see in the short-term.

The lessons of history are absolutely clear on this point. Abused fiat currencies always collapse and return to their intrinsic value, which is zero!

Right now our junior mining stock market is being driven by fear, and this brings me to Warren Buffett’s second quote, which illustrates his contrarian nature.

In other words, he buys when everyone else is fearful and he sells when everyone is greedy. This is the essence of successful investing.

Learn how to do this well, and you can’t help but be successful if you correctly understand the long-term trend.

Greed’s influence

So often, investors get caught up in greed. After all, most of us have a desire to acquire as much wealth as possible in the shortest amount of time…

The internet boom of the late 1990s is a perfect example. At the time, it seemed all a broker had to do was simply pitch any investment with a “.com” at the end of it, and investors leaped at the opportunity.

Buying activity in internet-related stocks, many just start-ups, reached a fever pitch. Investors got greedy, fueling further greed and leading to securities being grossly overpriced, which created a bubble. It burst in mid-2000 and kept leading indexes depressed through 2001.

There are other bubbles that have been created in our society by excessive use of fiat currency being pumped into the system. That money created bubbles which still exist in real estate, Dow stocks, and the mother of all bubbles, U.S. T-Bills.

The air is now coming out of those bubbles, and deflationary pressures insure the air will have to be completely removed before governments opt to do what they always do throughout history when confronted with these circumstances — create insane amounts of money out of thin air to avoid deflationary disaster.

Fear’s influence

When stocks suffer large losses for a sustained period, the overall market can become more fearful of sustaining further losses. But being too fearful can be just as costly as being too greedy.

Just as greed dominated the market during the dot-com boom, the same can be said of the prevalence of fear following its bust.

In a bid to stem their losses, investors quickly moved out of the equity markets in search of less risky buys. Money poured into money market securities, stable value funds, and principal-protected funds, which are all low-risk and low-return securities.

Warren Buffett showed us just how important and beneficial it is to stick to a plan in times like the dot-com boom. Buffett was once heavily criticized for refusing to invest in high-flying tech stocks. But once the tech bubble burst, his critics were silenced.

By avoiding the dominant market emotion of the time, Buffett was able to avoid the losses felt by those hit by the bust.

Keep in mind that managing fear and greed isn’t as easy as it sounds… There’s a fine line between controlling your emotions and being just plain stubborn. Train yourself to buy when the news is bad in our junior mining stock market and to sell when the news is good. And as you become better at this, your profits in trading junior mining shares will greatly increase.

You are the final decision-maker for your portfolio, and thus responsible for any gains or losses in your investments.

Sticking to sound investment decisions while controlling your emotions — whether it is greed or fear — and not blindly following market sentiment is crucial to successful investing and maintaining your long-term strategy.

Learn to think more for yourself. Managing fear and greed is really about understanding and managing volatility. It’s a balancing act that requires you to keep your wits about you at all times.

For those who can successfully navigate these tricky waters, the rewards can be great… particularly for those who correctly understand the major long-term trend and stick to it.

Good investing and have a nice holiday,

Greg McCoach
Investment Director, Mining Speculator and Insider Alert
Editor, Wealth Daily

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