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Leverage
– the Good, the Bad & the Ugly
In a perfect
world all investors would make correct decisions and all
leverage would be good leverage. Yea right, none of us are
perfect and frequently our investments and the timing thereof
maybe off the mark. Therefore, it is necessary for us to
evaluate the different choices of leverage to be used (if any)
in our investments.
As
timing our entry points are essential, the precious metals markets
have us waiting, waiting, waiting to learn if this year will
once again be another year for the sell in May and go away.We
wish we knew but even the best of the best advisors have differing
opinions. Therefore, our approach is to consistently seek
out value investments as they come our way, whether they are
common shares on the precious metals and uranium companies or
long-term warrants, leaps or call options on those ompanies.
Our basic
belief is that we are still in the early stages of a long term
bull market in the precious metals and yes, we are including the
uranium shares in this category. No doubt there will be
numerous consolidations before reaching a peak in the coming
years and our resolve and your resolve will be tested over and
over again. In my gut, I feel there will be at least one
incredible shakeout which will scare the hell out of all of us.
Will we have the courage, strength and belief to stay the
course? Remember, the markets will do their best to shake us
out at the bottom and suck us in at the top.
We
suggest that investors shy away from the use of margin accounts.
Remember last summer?
This game of
investing is dicey enough without the use of margin and we put
margin accounts in the category of the ugly leverage as the
downside risk can be very nasty, i.e. total loss of your
investment dollars.
So let’s take a
look at what we call the good, the bad and the ugly.
Good Leverage
Some investors
would believe that investing in the common shares of the
precious metals companies or uranium companies would be leverage
enough. But we encourage you to explore the use of call
options, leaps and warrants, preferably long-term warrants in
your investment decisions. This will require you to evaluate
your personal time horizon for investing.
If you are a
short-term investor, you may prefer to focus on the call options
or warrants which are expiring within one year. More risk, but
more reward, if you are correct.
For those
investors with a minimum of 1 year or more time horizon then
leaps and long-term warrants on some of your favorite companies
may be the way to go. Now, you have time on your side
and in the event of a consolidation you still have time
remaining on your leaps or warrants. Some of the leaps have
expiration dates out about 2 years and there are now many
warrants being issued with a 5 year life.
Of
course investors using either call options, leaps or warrants
or looking to increase their leverage and thus achieve substantially
higher returns on their investment dollars.
Bad
Leverage
Have you ever
made a bad choice of securities to purchase? Of course, we all
have made numerous mistakes in our judgment and timing our entry
points. The first consideration in the use of leverage is to
ask the question, leverage on what? What companies are you
interested in purchasing? You must first make this decision and
then look to see if other leverage, call options, leaps or
warrants are available on those securities. It’s easy enough to
understand that if your choice of companies and their common
shares do not increase in value neither will any of the choices
of leverage.
You have your
hard earned investment dollars at risk and if you do not have
the potential to earn a substantially higher return through the
use of call options, leaps or warrants, then forget it, and just
purchase the common shares. This will take doing some good
homework on the front end.
Ugly Leverage
Very simply,
any use of leverage where we actually lose our entire investment
or even 80% thereof is frankly just ugly. We do not like to
lose and we do almost anything to avoid being in an ugly
situation. When using call options, leaps and warrants, it is
always necessary to be aware of the expiration dates and exit
your positions well before to avoid a total washout of your
investment. As mentioned above, we include margin accounts as
ugly leverage for as we all know from experience a winning trade
can quickly disappear and turn very ugly.
In conclusion,
the use of leverage requires making decisions based upon your
personal investment time horizon and the amount of risk you are
willing to take.
For more
information on the use of warrants, we invite you to visit our
website and for information on options and leaps, visit the
CBOE.
For
subscribers, we furnish a complete listing of all natural
resource shares having call options, Leaps and warrants in a
simple to read table format.
May 10, 2007
Dudley Pierce Baker
Guadalajara/Ajijic, México
Email:
info@preciousmetalswarrants.com
Website:
PreciousMetalsWarrants
Dudley
Baker is the owner/editor of Precious Metals Warrants, a market
data service which provides you with the details on all mining
& energy companies with warrants trading on the U. S. and
Canadian Exchanges. As new warrants are listed for trading we
alert you via an e-mail blast. You are provided with links to
the companies’ websites, links to quotes and charts, tips
for placing orders and much, much more. We do not make any specific
recommendations in our service. We do the work for you and provide
you with the knowledge, trading tips and the confidence in placing
your orders.
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Disclosure/Disclaimer Statement
PreciousMetalsWarrants.com is not an investment advisor and any reference to specific securities does not constitute a recommendation thereof. Neither the information, nor the opinions expressed should be construed as a solicitation to buy any securities mentioned in this Service. Examples given are only intended to make investors aware of the potential rewards of investing in Warrants. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions involving stocks or Warrants.
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