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Long-Term
Warrants in a Conservative Portfolio?
You
may think I have lost my mind, after all, many investors consider
warrants to be a risky investment vehicle, right?
Give me a few minutes and let me lay out a few facts and strategies
for you to consider in your investment planning.
First,
we like to make sure before continuing that everyone understands
the definition of a warrant and why you would want to even consider
them in your planning. We suggest you read some of our
previous articles on our
website, including:
"Why Warrants? - Why
Now?”
&
"Why Warrants –
Why Now (Part 2)"
A
warrant is usually issued by a company in connection with a
private financing or equity offering such as an IPO (Initial
Public Offering). Warrants are like the icing on the cake
as they are an “equity kicker” in the transaction.
A warrant gives the investor the right, not the obligation,
to acquire the underlying common stock of a company at a specific
price and expiring on a specific date in the future. Many
warrants are never traded on the exchanges and are held privately
by mutual funds, merchant banks and private investors.
However, there are numerous warrants on the mining stocks which
trade on the U.S. and Canadian Exchanges which offer an investor
many choices.
Warrants
are usually issued by a company with as little as one year,
to up to 5 years before expiring and they can offer incredible
leverage which is a major advantage of owning the warrant instead
of the common stock of a given company. Leverage
as we know means getting the maximum return with the least amount
of your investment capital at risk.
Many of the
warrants currently trading offer “leverage” of better than 2:1
over the underlying common stock and it is always advised to
only invest in warrants with a minimum of 2 years remaining
before expiration.
Another
important piece of information to first consider is your
investment horizon and personal views and objectives. Do you
think we are in a bull market in the precious metals? While many
of us believe we are in the beginning stages of a major bull
market in the mining stocks, let’s assume that you are a
“conservative investor” and not convinced that you should even
be investing in gold bullion or gold mutual funds, much less
even considering mining stocks. However, frequently, you hear
that you should have a portion of your portfolio (5% - 10%) in
gold as a hedge, in the event of inflation or a major disruption
to our financial system, so you are somewhat confused as to what
to do.
So if you
followed the conventional views you would be encouraged to
investment this (5% - 10% allocated to gold) by purchasing gold
bullion, gold coins, a gold mutual fund or perhaps mining
shares. Frankly, we do not have a problem with any of these
choices.
So
let’s take a hypothetical portfolio of $100,000 where
we have it allocated as follows:
| Equity
Investments |
$
90,000 |
| Defensive
Hedge - Gold etc. |
$
10,000 |
| Total |
$100,000 |
Now
let’s assume in the effect of a major event or disruption
your equity investments (tradition stocks, etc) drop by 50%)
and the price of gold bullion doubles (100%). Your
portfolio would now look like this:
| Equity
Investments |
$
45,000 |
(loss
of 50%) |
| Gold
Investment |
$
20,000 |
(gain
of 100%) |
| Total |
$
65,000 |
(net
loss of 35%) |
Now
even though we had a defensive hedge with gold, we frankly still
lost our butts, with a loss of 35%. No doubt we would
have fared much better with our (10%) allocated to gold stocks
instead of gold bullion, but let’s consider an “aggressive”
defensive portfolio which includes long-term warrants.
Several
analysts whom we follow speak of a “10 bagger” meaning a stock
which will go up 10 times or 1,000%. Now we are talking! But
what if we look to see if any of these stocks have long-term
warrants which are trading.
“What
if” we found 5 different mining companies (for diversification)
which have long-term warrants trading and “what if”
we thought the common stock of these companies had the potential
to increase by 5 times or 500%. Remember, if we are right,
gold, silver, etc are rising sharply. Since we are now
looking at the warrants which have a leverage of at least 2:1
over the common shares, we now have a total return of 1,000%,
right?
So now let’s take a look at our portfolio:
|
Equity
Investments |
$
45,000 |
|
Warrants on mining stocks |
$110,000
(10,000 + $100,000 |
|
Total |
$155,000 (Profit of 55%) |
Frankly, this is our idea of a defensive hedge, one in which
we actually make a major profit even in the harshest of times.
Only you know
if a strategy similar to the above is for you. Perhaps you
would like to be even more aggressive with a larger percentage
invested in warrants. The choice is yours, but isn’t it nice to
have choices.
Always
something to remember is that warrants do not come without some
risk. If the underlying stock is trading below exercise price
on the expiration date, the warrant will be worthless which is
why we strongly recommend investors focus on warrants which have
a remaining life of at least 2 years. Time and Leverage is
what we seek in our analysis of warrants.
April 17, 2006
Dudley Baker – Owner/Editor
Guadalajara/Ajijic, MexicoEmail:
info@preciousmetalswarrants.com
Website:
http://www.preciousmetalswarrants.com
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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