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Dudley Baker

Dudley Baker

Dudley Pierce Baker is the founder and editor of Common Stock Warrants and its predecessor, Precious Metals Warrants and a 1967 graduate of St. Mary’s…

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Risk Management for Precious Metals Investors

As this bull market progresses forward in the precious metals and commodities sector, we should be ever mind full of the potential risks as we move higher. If you are saying what bull market? We understand. The junior mining shares have lagged greatly up till now and may continue to do so but we believe this situation will resolve itself soon with the juniors catching up and catching up very fast.

Let's talk about how we can manage risk in this environment. One obvious way of managing risk is to invest less money. Invest only what you feel comfortable with so you can still sleep at night. We would not suggest this to be the time to sell the juniors at these low levels but you should always be reviewing your portfolios, lightening up on those non-performers and adding to the stronger positions.

Currently with the pull back in many of the junior's there are great companies with production selling at small market caps and for less than $1. Why pay the same price for a pure exploration company when you can buy a producing company? Do some simple math as to the market capitalization of each company that you currently own or that you are considering buying. Multiple the total shares outstanding by the current price of the stock; this is defined as the market capitalization. It is important to compare the market capitalization of companies instead of just looking at the share price. In other words, one company shares selling at $1 maybe cheaper (a better buy) than a company's shares selling at $.50 when we look at the market capitalization. Something you should consider in your investment analysis.

Another suggested way of managing risk would be to utilize options, leaps or long-term warrants in your investment strategy.

Briefly, options give the holder the right but not the obligation to purchase the underlying stock at a specific price and expiring at a specific time in the future, usually up to 1 year in length. Leaps are exactly the same but for a longer period of time, up to 2 years. Warrants, which are our specialty, are slightly different. Warrants are actually issued by a company, trade similar to the shares with a symbol and can have a life of up to 5 years.

When you hear the word warrants, do you think risk? Think again. A long-term warrant with a remaining life of up to 5 years must be considered an investment not speculation. With these choppy markets, if makes sense to us that the longer life we can get the better chance we will be winners with our investments.

By utilizing options, leaps or warrants you can reduce your total capital at risk in this bull market and heaven forbid if the juniors do not catch up quickly, we will have less money on the table.

The markets are great at testing our convictions and investors must be confident in their views, beliefs and arguments for the bull market in the precious metals and commodities, or else will live in fear each day or each down turn in the markets. Personally, we are confident the markets will reward investors beyond our wildest dreams. But successful investors must have the strength and confidence to stay the course.

In our subscriber service, we furnish a table of all natural resource stocks which have options, leaps or warrants trading. Savvy investors could also use this table as a starting point for more sophisticated strategies using warrants and options or leaps.

For those readers desiring more information on warrants you may wish to visit www.PreciousMetalsWarrants.com where you will find much more information and education on warrants in our new Learning Center. You may also signup for our free weekly email, The Warrant Report.

 

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