A junior explorer’s chances of making you money in the past decade were about as good as a wild salmon egg’s chances of surviving to hatch.
The score here: 15% for the egg – according to Canada’s Department of Fisheries stats on wild Coho – and 22% for junior explorers listed on the ASX.
These latter junior stats come out of a recent random sample on returns of 100 ASX exploration juniors between July 4, 2004 and July 4, 2014 made by MinEx Consulting’s Richard Schodde.
You might take the sobering level of death, the sheer pervasiveness and magnitude of losses, as reason to avoid fishing at all – for salmon or microcap explorer as it were.
So few make it. Why bother trying to catch a living one, let alone a good one?
But don’t retire your fishing gear to the attic quite so hastily. There’s still reason to hang onto your cork and tie a fly.
Schodde did a historical test as a hypothetical investor. He wondered: what if you invested $100 000 into 100 randomly-selected junior explorers – $1 000 each – on the ASX back in 2004 and held, stubbornly with no regard for market timing or stock picking, for ten years or until forced to take profits/losses by a takeover or otherwise.
How would you fare?
The answer was that while eight out of ten companies lost you money, most by a huge margin, the hypothetical portfolio worth $100 000 in 2004 still gained 60% to $160 000 in 2014.
Schodde gives a powerful bird’s eye view in a recent presentation slide, reproduced below (for more of his research, check out his website here.)
Schodde, speaking in a phone interview last Friday, put the results of his test this way.
“Basically what it says is eight out of ten companies lose money,” he said. “One out of ten makes you a modest amount of money. One out of ten makes you a lot of money. And really it’s that one of ten that pays for the other nine.”
Indeed, in his lot of 100 there were four ten-baggers and the top ten companies in terms of returns spoke for near 80% of the value made in the full portfolio over the decade.
Otherwise the junior explorers – pursuing an endeavour of discovery with slim odds of success – did what many would expect: lost most of your money. Out of the 100, 41 companies ended up at 10% their original value after a decade, Schodde notes, and almost one in five came out near worthless under 1% their starting value.
But let’s not treat these numbers as Gospel.
Even though, overall, 100 randomly selected juniors on the ASX appreciated 60% in value over a decade doesn’t mean they always will.
And while the portfolio didn’t exactly take its profits at the best of times – the junior explorers have been in a bear market for at least a couple of years and thus, admirably, the portfolio duration is not handpicked to coincide with tops and bottoms – it still coincides with a boom in the important driver of resource stock: metal prices. In a decade of Chinese growth these still climbed hugely even taking into consideration the recent retrenchment in metal prices and demand.
For the big picture, here’s the metal charts over the same period as Schodde’s portfolio test (below). One is the IMF metal prices index, weighted to base metals, and the other is the gold price. Metal prices aren’t exactly at max pain in the ten-year view and their appreciation certainly didn’t hurt the portfolio’s value.
Yet Schodde’s research drives home an important principle that diehard investors in junior explorers must live by. Accept huge failures in a sector where few prospects become deposits and focus on catching the outsized returns.
The ten baggers, the five baggers, the double-ups, are all that really matter if you want to make money.
Schodde’s view is this: “If you’re going to invest in the junior (exploration) sector it’s a good idea to have a portfolio of companies. You can’t pick winners. Or, it’s very hard to pick winners. So you’ve got to have at least ten or 20 companies in your portfolio to have a reasonable chance of catching one of those ten baggers.”
Note that Schodde is not advocating a random approach. Just that in choosing (in doing your homework and managing your portfolio) there’s some safety and necessity in numbers.
Success will mean losing a lot of fish from the hook or never getting a bite in first and yet still showing up at the favoured fish hole to cast your line anyway. As the junior investing mantra goes: high risk, high reward.
“You can make good money at this,” Schodde opined. “But I wouldn’t put my mother’s money into this, okay?”