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Average 3-year nominal returns when buying a down sector (since 1920s): Zero Hedge

Posted by Richard640 @ 8:09 on November 10, 2014  

We’ve mentioned previously where we believe asymmetry lies. In the Japanese Yen, which we discussed here, here and here, and more recently Brad’s shorting of the Renminbi which we detailed here. These are trades which we’ll just keep rolling as part of a broad asset allocation and risk management plan. We believe our ship will come in and we’ll be patient until such a day arrives.
What I’d like to look at today is a sector I think well worth a bit of scrutiny… miners. Oh, what a dirty word!
Before providing you with the basic investment thesis, I’d like to review an article we published entitled, “Buying Bombed out Equities for Outsized Returns”. In it we provided some stats worth reviewing.

Average 3-year nominal returns when buying a down sector (since 1920s):

Down Avg. Annual Return
60% = 57%
70% = 87%
80% = 172%
90% = 240%

Average 3-year nominal returns when buying a down industry (since 1920s):

Down Avg. Annual Return
60% = 71%
70% = 96%
80% = 136%
90% = 115%

Average 3-year nominal returns when buying a down country (since the 1970s):

Down Avg. Annual Return
60% = 107%
70% = 116%
80% = 118%
90% = 156%
Notice that the second column is the average annual net return. Now, average is… well, average. Imagine you put even a little bit of effort into a sector, country or industry.
The beauty of what I’m sharing with you is that if you just focus on the numbers and take all of the emotion out of the equation, it’s no longer about being contrarian or trend following; it’s purely about following a statistical formula. While that is no guarantee that the particular sector, country or industry you’re tracking will perform as indicated above, it does provide a proven process, and we’ve got the data to prove it.
In light of the above I present to you one of the most horrific investments of the last few years (one which we’ve recommended on occasion, ugghhh): gold mining stocks.
The GDXJ ETF is down 87% from its high in late 2010, and the GDX ETF is down 74%. Statistically we could expect a pretty spectacular return going forward. Both seem like they’re still in free fall and I’m not here to pick a bottom., I’m just playing the odds. Nobody and I mean nobody wants to have anything to do with this sector. The odds look decent to me.
Now these are the ETFs of course, and the problem with mining stocks in the ETFs is that most of them are complete garbage and will never make any money. At least not for shareholders.
For this reason we put together this list of mining companies – all selling for less than cash.
I humbly suggest that simply remembering the statistics above and then buying a basket of better performing companies which are selling for less than cash on their balance sheet, will reduce overall portfolio risk, provide potential for outsized returns and should the strategy work out with the sector rebounding, the returns on the stocks here should theoretically outperform the index or ETFs.
Just remember this isn’t a call on gold going through the roof, or anywhere at all. It is merely looking at asymmetric trading opportunities.
Best of luck!
– Chris

“A stock operator has to fight a lot of expensive enemies within himself.” – Jesse Livermore

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Post by the Golden Rule. Oasis not responsible for content/accuracy of posts. DYODD.