Thanks for the kind comment in your last post 2ic. The fact is, at least as I and others here see it, your input into this stock forum is really the most valuable of any individual contributor, and then a few of us others just complement your content, so keep up the great work.
one points I'd like to make today, given the mineral sands sector seems to be on a cusp:
The canary in the coal mine (as usual, you'll need to bear with me)
There's an investor profile termed 'contrarian'.
These investors usually pick stocks which are 'cheap'. The cheapness attracts their attention, however the cheapness is usually a consequence of the very fact that the broader market is focussing elsewhere on stocks or sectors which are delivering current term benefits rather than benefits that will accrue well into the future, when certain planets align.
Although the stocks identified are 'cheap' at current prices, the problem with this strategy, is that for the contrarians' conviction to be vindicated, a shift in the broader market's focus onto the contrarian sector needs to happen, and this sometimes takes years and the factors that will lead to short term gain may not eventuate for years.
We all know that time dilutes annual return %age and also means opportunity cost. This doesn't mean that a contrarian after years of patiently waiting won't make a good enough return, they often will because they were able to enter at relatively, very 'cheap prices', however the extended time factor is nonetheless a downside.
Is there a way of mitigating the timing issue and yet still getting being able to jump into 'cheapness' before the train has left the station?
I think there is, it's not a guarantee but it's a strategy that stacks the odds in the investors favour a bit more.
the suggested strategy requires an understanding both of the contrarian phenomenon of cheapness, and an understanding about how money flows into large cap stocks first and then filters down into mid a and small caps.
Put simply, once a sector shifts out of the unloved category and onto the investment community's radar, fund money starts being redeployed into the emerging sector.
The Fund Managers start off by focussing their flow of money into the large caps, primarily due to the better liquidity, potential of gaining larger dollar exposure, the lower risk nature of bigger established businesses etc.
As the value proposition in the large caps dries up, ie prices rise, the buying demand driven by the re-directed flow of money into the emerging sector can only continue to be satisfied at reasonable valuations if it starts flowing into the mid and small caps in that sector.
This is the simplistic explanation why we see large cap share prices rising first in an emerging sector followed by mid and small caps.
Therefore a good way of getting the best of both worlds is to keep an eye on the tell tale indicator that money is starting to move into a sector, that is, a 25%+ move in the large caps in a previously unloved sector.
Once they have moved the cheapness, to some extent has already evaporated. However the mid a small caps are probably going to start to moving in a relatively short time frame, and often still offer a cheap entry without the timing vagaries of a pure contrarian strategy.
Needless to say, due to the rising mineral sands prices, the mineral sands sector is starting to experience an influx of investment funds, ILU (and other mineral sands majors) is up almost 100% in the last 8 months.
Another sign of the shift, is an increase in media articles on the sector, this means more people become alerted to the shift and they in turn start talking to others, all this has a snowballing effect on sentiment, the flow of money into the sector, and hence SP movements.
Obviously this is a general strategy, and an investor must also consider the fundamentals of each company in the sector, but its very much worth keeping in mind as a factor to consider in you buy and sell timing.
As 2ic, mentioned, I think a lot of SFX investors are waiting for it to pop, the buy/sell sides sure look like it could anytime, pressure seems to be building, and it sure does seem like the planets are aligning.
fingers crossed.
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