What is my investment style and why I hold some gold shares (as of today anyway, maybe not tomorrow!).

Warning – Long post and with links gets longer!

Gold has been topical today after a sizeable retracement and I thought I would tackle the above questions. Especially considering conceivably, I could even be selling more gold stocks soon, time will tell.

Many great investors avoid commodities altogether and I have a lot of respect for that view, so why have l held stocks and ETFs this year with commodity exposures?

I will provide a link to a podcast that probably explains the reasons best from Meb Faber. I have his site under the useful web links category on this blog but not sure I have mentioned his weekly podcasts. I have listened to virtually all of them (over 20 at the moment) and find them quite interesting. You should find the podcasts by searching for Meb Faber on iTunes, or I am sure his web site should direct you there if you are interested. Here is his website. It is the very first podcast, episode one on Global Asset Allocation that I refer to here.


I understand many won’t listen to the podcast so to summarise I concede the commodities asset class is inferior over the long run to equities. Yet having a certain percentage allocated and it may only be about 10%, I believe will not sacrifice too much in returns over long periods (talking decades here!), with the proviso one must rebalance regularly, perhaps once or twice a year. As part of a balanced portfolio the benefits will be most likely a reduction in the drawdown of your portfolio. I concede though a strong minded investor who knows they can live with very rare large drawdowns may well be better avoiding commodities altogether.

The weight one decides to set to the various asset classes is surprisingly not as important as you think (well that’s the conclusion from the podcast). What is crucial is not deviating from your plan in setting targets, and also rebalancing. This is why a few months ago I sold EVN in the 2.90s when my exposure was increasing in gold stocks. Normally I would have sold others on the way up here but the run up was very explosive. I figured if I just set trailing stops on many there is a good chance those stop levels will be better off than if I tried to pick the top. That has proved the case remembering I sold half a parcel of RMS for only 23 cents. If I was rebalancing more regularly and trying to go on my gut feel when it had run too hard I am sure I would have exited it all by 30 or 35 cents max. So the fact I may well stop out of this soon in the high 30s doesn’t stress me, despite the fact it hit 60 cents at one point! I should also point out than being too closed minded as an investor can risk missing opportunities in unfashionable sectors. Remembering that when entering RMS some time ago (below 10 cents), they had a market cap around cash backing that had been showing a clear positive trend up over a few quarters reporting. I do believe there is an attractive price for nearly any asset.

The podcast I refer to also takes it further in that further diversification may make sense. For instance, try and seek out countries, even emerging ones outside of your own country that have attractive valuation measures to represent much of the equities exposure. History is littered with individual countries having huge turmoil in their stock market and currency and way underperforming other countries at given times.

Back to gold, if I am stopped on other gold positions this merely takes my exposure to the commodities sector from overweight to close to my target. I will continue to retain exposure with CEF:US and GOLD.AX (no stops here).

I don’t want to get into debates about Gold as there are too many of those already on the internet. But just wanted to provide some context if some that are reading sometimes wonder why I hold boring LICs, yet volatile gold stocks at the same times on occasions. Also for anyone thinking it is strange that I would sell some gold holdings after they have fallen well off their highs. As the sector surged earlier in the year I made the decision I should rebalance out. It’s just the way I have implemented that rebalancing out of some gold exposures is a bit different. It will probably happen to be via trailing stops to lock in profits as the shares fall, rather than trying to pick the tops.

The most important thing I feel with asset allocation is to understand what mix suits your temperament. Many think they know that they just are happy with the dividends from a 100% stocks portfolio and the market volatility doesn’t matter.

Until it does.

The unfortunate thing is that it is actually extremely difficult to know what mix suits your style. I think you only begin to get a clearer picture when you have a significant part of your wealth exposed to the financial markets in a year like 2008. Those that are new to the markets in the last 7 years (where there really have been no scares despite some arguing it has been a volatile time), will struggle to obtain a true answer to this question.

I should also mention the podcast emphasises for most that keeping fees and taxes down and using index funds can be a smart idea. I fully agree but in recent years tackle it in a different way. By entering into some LICs at large discounts to NTA is a different way of getting an investment manager effectively cheaper. I am mindful of taxes and excessive trading by often searching for situations with capital returns, franking credits, and letting some winners ride longer and occasionally taking a loss early. I can also choose to hold an investment sometimes within my SMSF our outside, so potential taxation consequences could also play a role in this decision.

Aside from this I have noted before I search for situations that other activist investors may take action on, or “event driven” situations as some may refer to it. I probably covered the reason behind this in an earlier post here.

Warning 2 – This link is another long post!


I hope this says a bit more about my investment style because I haven’t really written in a lot of detail before how I am trying to go about things. I will make a new category on this blog for whenever I expand on my overall investment approach to keep such posts in the one area.

Leave a Reply