Jim Letourneau's Blog

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The Dark Side of Resource Stock Investing - Part 2

Part 1 of the Dark Side of Resource Investing discussed politcal risk.

Part 2 of the Dark Side will discuss liquidity issues. A big positive of investing in resource stocks is that they have good leverage to rising commodity prices. They are comparable to call options that never expire. If you have ever bought or sold options you're probably familiar with liquidity issues.

You will run into liquidity issues fairly quickly chasing performance in the junior metals/oils even with a small account. There is no easy solution to buying and selling illiquid stocks. Your $5,000 investment in a junior is equivalent to a $75,000,000 stake in Microsoft. The bid/ask spreads are usuallly higher for junior stocks and don't expect to be filled without having to hit 2-3 bid/ask levels which can represent a 10-25% hit. Ideally you buy weakness and sell into strength but if that strength never appears you'll be an expert on the consequences of buying and selling illiquid stocks. I suggest longer time frames (weekly charts) and partial buys/sells to assist with liquidity issues. Avoid using market orders unless you are 100% certain that you need to get in/out of your position.