For those looking to the junior resource sector for investment options, the Power of Two philosophy is that Mercenary Geologist Mickey Fulp says is “the most important concept.”
Back in 2010, Fulp wrote that junior resource investing is “actually gambling,” something he alleges to have said quite often.
That being said, the Investing News Network (INN) recently spoke with Fulp about:
- how the Power of Two Strategy works;
- whether or not one needs to be an accredited investor or insider;
- what factors investors should consider before investing in a junior resource company and applying the Power of Two Strategy; and
- if there are any companies Fulp currently likes
Below is a transcript of our interview. It has been edited for clarity and brevity. Read on to see what Fulp had to say.
INN: Thank you very much for carving out some time with us this morning. What we’re looking to do is have a conversation with you, with regard to your investment strategy: the Power of Two. Can you explain to our audience a little bit about this strategy, and how it works?
MF: Literally, it is the Power of Two because you’re trying to double all the time. You can call it an investing philosophy, but the junior resource sector, in my opinion, is pure speculation.
In my opinion, there are no buy-and-holds in the junior sector. As such, we adopt an active trading philosophy. We’re trying to employ a very conservative trading strategy in a high risk, high reward market.
Here’s the way it works. You buy shares of a junior with the goal to get a share price double in less than 12 months. That’s not so hard to do.
I will challenge you to find any active junior, not one of the “zombie miners”, in any running 52-week period that does not have a double from its low to its high. Give that fact, it is incumbent on us to do thorough due diligence and pick the stock when it’s low, and sell when it’s high.
That said, we only sell half; this is where the Power of Two comes in. When it doubles, you sell half and you still have half of your original shares at zero-cost basis. You then take your original capital and do it again. Find another junior that you are convinced will double in 12 months or less and buy it at a low point when trading volume is low.
When the second one doubles, you sell half again. If you do it twice, you still have half of your positions in two companies at zero-cost basis and your shares are worth twice what you originally paid for them.
If you do it three times your remaining paper is worth three times what it was originally. Every time you do this successfully, you are increasing your net worth on paper by your original investment yet still preserving that capital for another speculation.
It’s basically a rinse and repeat thing. Of course, you have to do very thorough research and due diligence every time so this requires concerted effort. This methodology is not for lazy people who get their stock tips from Aunt Nellie or Joe Six-Pack or the milkman.
INN: Now, it doesn’t sound like you need to be but does it help if you’re an accredited investor or an insider?
MF: Absolutely not. I started out almost 25 years ago as a retail-lay investor. Note that I am an experienced field geologist, so I have a somewhat specialized insight into this business. But no, you do not need to be an accredited investor unless you want to participate in private placements. I am an accredited investor but I apply the same philosophy for private placements as for open market trades. Also I have never been an insider of any public company listed on any stock exchange.
INN: You suggest that pretty much any junior research stock over any 52-week period could have, or should have at some point, doubled from low to high–
MF: They will. I challenge you to find one that does not.
INN: For our investors, what factors should they be looking at before they commit to investing in a junior and applying the Power of Two strategy?
MF: This comes to my original premise of how to evaluate companies: there are three key criteria for every company: share structure, people, and projects. I want a tight share structure where insiders have significant positions and they do not sell their stock. They take reasonable salaries and are rewarded with options for running the company to the benefit of shareholders. I want a significant portion of the outstanding shares to be held in strong hands– management, insiders, and family and friends.
Then there are the people: I prefer technical people at the top of juniors–CEOs that are either geologists or engineers, and that have had previous experience and success in the junior resource sector.
A CEO, who has had three companies that have gone belly-up, went bankrupt, rolled back, reincarnated, paid debt with shares, etcetera, is no longer an entrepreneur or a venture capitalist. I would not choose to buy stock in his company. Trust me, I know a few guys in Vancouver with those sorts of track records and they will still get CEO/promoter jobs in the next up-cycle.
Finally, the project: I prefer advanced exploration projects because that’s generally where you get the biggest bang for your buck; what I call a flagship project. I also like the prospect generator model where a company generates prospects of merit, turns them into joint ventures with other companies who then pay to explore them for an earn-in. This is a great way to preserve capital and keep share dilution low but it requires a crack team of talented geologists and prospectors.
INN: Excellent. Thank you for the insight. To help or point our audience in the right direction as they start to do their due diligence, are there any companies that you like what they’re doing currently?
MF: There are an awful lot of companies that have jumped way up in price this year but especially so for the gold miners. Right now, I think the upper tier of gold companies–the miners, the developers, the near-term production stories– are mostly over-bought.
At this juncture, I’m looking further down the food chain to the advanced explorers and even to start up juniors with the right people, a tight share structure, and a promising project. The contrarian idea is to find stocks that are unloved, unwanted, unknown, and under-valued at any particular time. My current favorite is Mawson Resources Ltd (MAW.T), which I own and it also pays a fee to sponsor my website. So my bias is obvious. That said, Mawson has a gold discovery in northern Finland that I opine holds lots of promise. A big winter drill program is in the works.
INN: Okay, we’ll be checking in with you and look forward to bringing more picks out when you’ve made them.
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Securities Disclosure: I, Jocelyn Aspa, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.