My old friend Steve used to write stories about “Old Turkey”. He was a character from Jesse Livermore’s Reminiscences of a Stock Operator.
Old Turkey was known for his patience in a bull market. Because the hardest thing for most investors to do is nothing. His advice was always to “sit tight” and don’t sell during a bull market.
When younger traders would tell him to sell and buy back in cheaper, his response was:
“Why, this is a bull market!”
His point was simple. You don’t want to lose your position in the hope of a dip to wring out a few extra dollars. He wanted to stay invested for the long trend and ignore the day to day (or intra-day) price swings.
The trick is to recognize when the bull market ends. And that is the key to making money in natural resources. When the trend is up, ignore the noise and ride the wave…because these stocks can go up far higher than you would ever expect.
But when the music stops, you need to get out…immediately. Stock gains are ephemeral. They can go away in an instant. We’ve all seen it. Up one day and then poof, down the next. You must have a way to know when to turn those paper gains into profits.
Take Seabridge Gold (NYSE: SA) as an example. This was the first company I went to visit. The project was in the wilds of British Columbia. It was a valley surrounded by glaciers. The only access (back then) was by helicopter. The deposit was a huge swath of low-grade gold and copper.
And as the price of both metals rose, so did Seabridge’s share price. The chart below covers the period from 2006 to 2011.
As you can see, the stock rose over 350% twice in five years. The global financial crisis interrupted a perfectly good bull market in metals (which was a good reason to sell). However, this remote gold exploration project still garnered a ton of investor interest.
If you just took Old Turkey’s advice, you probably rode Seabridge up, then down, and possibly sold in disgust in late 2008…
But that’s not what happened to my readers. We used a simple mathematical formula called a trailing stop to tell us when to sell. I generally use a 25% trailing stop.
We didn’t use our “gut” or “intuition”. And we sold our entire portfolio in early 2008 thanks to that trailing stop.
We re-entered mining stocks in early 2009 and made a ton of money, because many investors remained on the sidelines.
Today, we have an outstanding bull market in metals. The wave is pushing all the stocks up. And with any luck, this bull market will last a couple of years. We certainly have the right conditions for the long run.
And that’s when we need to think about old turkey. We don’t sell until we get the signal. Hold tight and enjoy the ride. But use a simple trailing stop to make sure you can convert your paper gains into cash.
