Monday, February 01, 2021

It's Been Fun Playing, But I Will Pick Up My Marbles

Benjamin Graham (1894-1976), the
father of fundamental analysis
Investing in stocks, your humble blogger first turns to fundamental analysis, which tries to determine the "intrinsic value" of securities both from a projection of earnings and dividends as well as the fair value of assets and liabilities on the balance sheet. Yes, it's hard work and as boring as it sounds, but some of the most successful investors in history have used FA to determine when to buy or sell a stock.

More often than not, however, emotions rule markets, such as the Reddit frenzy that has driven Gamestop, AMC, and other heavily shorted names to prices that cannot be rationalized under even the most optimistic scenarios.
Thousands of members of WallStreetBets, a forum at the online community, have been leading the swarm of amateur individual traders buying stocks that hedge funds and other institutional investors were betting against.

Moving in sync and en masse, such traders can drive a stock way up or down even if each trader commits only a few dollars. Professionals, on the other hand, are legally restricted from colluding and incur much higher brokerage costs.

These new mobs of amateur traders resemble swarms of animals that often coalesce in the wild. You may have seen videos of an immense school of fish flashing in unison through the sea or a murmuration of starlings forming a vast swirling vortex in the sky.

These swarms shift direction in swift, coordinated bursts to find prey and evade predators.
Even multi-billion-dollar hedge funds can be overwhelmed by the "swarm," so if an individual wants to participate on either side of the trade on one of these targeted stocks, it had better be with money that he can afford to lose.

Silver (Reuter's image)
The heavily shorted Reddit stocks have been well publicized, and to this bemused investor it is impossible to know whether they will go up or down from their present levels, However, one tidbit caught my eye last week: the price of silver was being discussed on the message boards, and precious-metal stocks had only risen modestly so far.

Those of us who lived through the rampant inflation of the 1970's are dwindling in number. We old-timers remember the "guns vs. butter" debate from the 1960's, when fiscal conservatives argued that the United States could not both prosecute the Vietnam War and implement Great Society social spending programs. The rampant inflation of the 1970's seemed to prove the fiscal conservatives correct.

The Federal Reserve under Paul Volcker wrung inflation out of the economy by forcing Treasury rates to the mid-teens and triggering a severe recession, and the lessons of that period have influenced generations of economic policy makers. Today's gargantuan deficits in the $trillions and near-zero interest rates have not resulted in inflation...yet; but now may finally be the time when history repeats.

The above is a long way of saying that I have started to shift my retirement portfolio into hard assets like real estate, precious metals, and related stocks as a hedge against inflation. So, back to Reddit targets: the fact that thousands of individual investors were beginning to look at silver accelerated this investor's decision to buy some poor-man's gold.

On Friday I purchased some Hecla Mining (HL) at $5.80, a stock that I had owned in the past, as a way of playing the silver market. As of this writing, HL is trading at $7.19, a 24% increase over cost.

There's been some chatter that the big-money funds have disguised themselves online as individual investors and are planting information to drive up the price of silver and silver stocks. It's been fun for a day, and I'll ride it a little longer before getting out.

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