You might have noticed that I have not published for a little while. The last few weeks I have had a lot of costs to cover, and have not been able to take advantage of the weakness in the market. When I can’t take advantage I revert to my second best strategy (for now), do nothing. That also means taking less part with the discourse where you sometimes meet frustrated people.
I do not see a lot of triggers as we are getting closer to the end of the year, but we might get news of nuclear being included in the green taxonomy 22. December. I just hope that it is not discounted into the companies valuations already, as with section 232 in July 2019, and a negative outcome will lead to a sell off in the sector.
This week I will just make a small case that people who start out now should hold closer to an Equal Weight Portfolio, and not be so dependent on their favourite company doing better than the rest in the sector. Many are talking about their biggest allocations like they are football teams. When you are not a fan of football, and look at it from the outside, it seems a bit silly. I have mentioned some of my winners before so I am not innocent here myself, but I try not to be a big part of the “pump” crowd. That is why I would approach the sector more in this way if I was starting today.
Equal Weight Portfolio
Equal Weight Portfolio is an alternative to the Market Weight Portfolio you see in most sector ETFs. Sector ETFs allocate most of the money to the biggest companies and less to the smaller names. (The biggest companies are in some cases already profitable, and do not always have the same leverage to higher prices as the smaller companies. They also do not have all the risks that come with investing in smaller companies). If I believe the sector is mispriced and going into a strong period, I would rather allocate the same amount to my selection of companies, than using market weighting.
If there was an equal weight version of the URNM, I would say that is very close to the optimal allocation for me when I was a beginner. I give all the different companies the same allocation at the start and give them room to outperform. I do not sell them down because their allocation gets too high due to outperformance, according to the rules of many funds. I let the winners run.
My biggest negative here is that URNM has a long list of companies (there are about 35). Replicating it is not necessarily a cheap option in terms of commissions. (If someone could offer an ETF fund similar to this I think it could get very popular).
You can do a lot of work and be selective too, but in some instances you get 80% of the benefit with 20% of the work. The veterans and the full time professionals have maybe had the time to investigate all the different companies in the sector beforehand. I did not do that when I started out in the sector and I made a lot of mistakes in the beginning. (I do not believe that anyone has a perfect portfolio, and I also believe that if people can have a perfect portfolio they might sell down too early).
One of the mistakes I made was that I made my positions in a couple of positions without having a good enough overview of the sector. My two best performers (so far) were not a part of this initial allocation. Both of them were already trending in the right direction compared to the rest of the sector, but I didn’t even know they existed. I was still able to get a decent position in both of them, and I have been able to take advantage of corrections to add to them.
Another thing I have seen is that it is not always what you think is the “best” company that has the best returns. It all depends on the valuation of the company. From March 2020 low you had Forsys Metals go up to over 1 000% in returns (at one time) with just an old DFS and minimal work in the company. Compare that to a lot of the other companies that have (at least pretended to have) done a lot of work in the last 10 years of the bear market. I am singling out Forsys out here because they have been so silent that they slipped under my radar. For a guy looking for hidden value, I failed in finding this company. The market is seeing a lot of value in this company as the search for mineable pounds in the world is increasing.
I try to be as neutral as possible about the positions I already own. I do not want to be too attached to one company.
I have two beliefs in my head going forward, and they can both be true. My best performers can be overvalued compared to peers, and the rest of the sector might catch up. They can also continue to outperform because of great management.