Smaller Things Grow Faster
Silver Stock Report
by Jason Hommel, June 19, 2006
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One of the most important investment principles that I've ever discovered is this:
Smaller investors have the greatest advantage of all, because they can grow their money the quickest; but big money grows the slowest.
In other words, acorns can grow into big oak trees, but big trees cannot grow to the moon.
For example, you can buy a soda for 50 cents, and sell it later that same day for $1.00 on a hot day, and make 100% in a single day! But the next day, you’d have to sell 2 sodas, then 4, 8, 16, 32, 64, 128, etc. But that kind of work might not be enough to pay the rent, and that kind of growth is unsustainable. Within a week, you have a job that’s too much for you, and you have to give up some of your gains to hire workers or buy vending machines to keep selling soda. Or, the season will change, and you can’t sell any soda if it’s not a hot day. Or, you’ll have to get a permit to sell that much soda. Or, you’d fill the needs of the market, and not be able to increase sales day after day. Or, competitors will show up, and you’ll sell less.
The former generation of investment advisors will typically tell you what I consider to be half-truths when it comes to compounding your money. They will say that if you save $10,000 by age 18, and never again add to your savings, and if you are able to compound it at 10% per year, than you can retire as a millionaire by age 65. This is true, factually true. You can grow 100 fold in a lifetime, at 10% per year.
But what good is a million dollars if there is hyperinflation, and a loaf of bread costs $10,000 in 40 years? The real truth is that you not only have to earn 10% per year, but you have to earn 10% more than inflation each year! If inflation is roaring along at 7% in consumer goods, you need to earn 17% per year! And if they are creating new money at a rate of about 15% per year (which is close), then you need to grow 25% per year! Or, if years of prior inflation show up all at once, you may have to do better than 50% to 100% per year!
Furthermore, it is terribly misleading if you end up thinking that you should grow at no more than 10% per year, if 100% to 1000% is more realistic for you!
Fortunately, if you are a small investor, you can grow your wealth by 100% per year, or better! (After all that’s merely a doubling, or a 2 fold return.)
Issac grew his wealth 100 fold in one single year; from simple farming!
Genesis 26:12 Isaac planted crops in that land and the same year reaped a hundredfold, because the LORD blessed him.
Large investors, on the other hand, have great difficulty growing so fast, or outperforming the market. You can prove this to yourself on an excel spreadsheet: If you invested 1 oz. of gold 6000 years ago, and compounded it at ¼ of 1% per year, then you’d own more gold than has been mined in the history of the world, over 6 billion ounces, which is obviously impossible. If you grew your ounce of gold at 2% per year, over 6000 years, you’d own all the atoms in the universe, all of it would be gold, and all of it would belong to you. Clearly, that kind of growth rate, 2%, is impossible—for the largest money to achieve over long periods of time.
In fact, the largest money cannot even grow more than ¼ of 1% per year. And if it does, then it must have corresponding years of losses to make up for it, just like a mature oak tree cannot compound its way to grow to the moon.
This math proves, beyond a shadow of a doubt, that it is impossible for “the rich to grow richer, and the poor to grow poorer”. In actual fact (and even a casual look at history shows this to be true) the poor grow rich fastest, and the rich have to always struggle, just to maintain their wealth. And more often it seems, people who inherit wealth squander it. As it is, the USA seems to be squandering its wealth, too, neglecting to invest in gold and silver (and possibly even secretly dumping the Treasury's gold), whereas India and China, the poorest nations on earth, are making the best investment decisions; to buy gold and silver!
It’s been said that people on welfare live better than kings who lived hundreds of years ago. Today, people have more food choices, faster transportation, cleaner living, longer lives, better entertainment, more conveniences, better homes, better access to information, (and who knows what else is better!) than ever before in the history of mankind. The poor are growing richer; both here in America, and around the world.
Christians are not supposed to loan money out at interest.
Luke 6:35-37 But love your enemies and be good to them. Lend without expecting to be paid back. Then you will get a great reward, and you will be the true children of God in heaven. He is good even to people who are unthankful and cruel. Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.
One problem with lending money is that when it is practiced to excess, there is no way that it can work. How can the U.S. pay back $8.3 trillion of Federal debt, and how can society pay back up to $30 trillion in private debt, when there is less than $1 trillion of cash and coin in circulation in the banking system, and only $10 trillion total in electronic money? The point is, bonds are going down in value, not only because interest rates are too low, lower than the rate of inflation, but because the bond market is too big, like a mature oak tree that is ready to die from rot and branches falling off.
Wall Street tends to put the smartest money managers in charge of the most wealth; but brains cannot overcome the natural fact of life that small things grow faster, and big things grow slowest, or die. And I suppose that very few of them truly understand the effect of size on growth rates.
In fact, do you know what some of the supposed “geniuses” do? They weight a portfolio based on the market cap of the companies they hold! So, the larger the market cap of the companies they pick, the more they will invest, which is exactly backwards of how it should be done! They should, instead, invest the most money in the things that have the greatest potential to move up in value! They should, instead, invest the most money in the smaller companies, and in smaller markets, such as gold and silver!
Sometimes, there is one organization in charge of managing over $211 billion dollars, such as with CalPERS, the retirement fund of California State employees. But putting one entity in charge of too much wealth is as bad as price fixing or central planning, and the free market will outperform large central planning every time. (The free market outperforms because people who are responsible for their own wealth are far more productive than wasteful and inefficient central planning.)
So, one of the untrue myths of Wall Street is “you can’t beat the market”. But in fact, you should expect to significantly outperform the market, because you are not as large as, and certainly not larger than, the market! Your greatest edge is your small size.
So, the biggest reason that bonds are going down in value is that the bond market is too big! $30 trillion?
And the biggest reason why silver is going up in value is because the silver market is so small! $1-5 billion? For more, see “The Money Chart”.
The tiny size of the silver market is proof that it will go up in value over the long run.
Many gold and silver investors get so discouraged by the dips, and they email me, saying things like “The Fed is too powerful, they will never let silver rise.” Well guess what? The Fed’s large size guarantees that they will fail, as they have failed! And now, with recent price history, we have proof that the Fed is failing right now! In fact, the Fed failed big time when gold went up from $20 to $35 in 1933, and they failed again in 1971 as gold went from $35 to $850 in 1980! Once again, they are due for another big failure, right on schedule, about once every 30 years.
Small investors, be encouraged! A small size is a tremendous advantage, and you can grow your wealth really fast, because you can take advantage of situations that other, larger investors, “cannot”, or will not, take advantage of.
But small investors have special challenges to overcome. First, the least wealthy investors tend to have the least time to study about investing, since most people are often too busy trying to make a living. Thus, by the time the average guy hears about a good investment through many forms of media over several years, and sees the continuing price performance going up, it’s usually too late, and he is buying at the top, such as getting into real estate about now. Second, the smaller investor might not be able to ride out an investment in case it takes a temporary dip that lasts a short year. He may need his money back in case of emergency, and be forced to sell. Or, without having the time to study out an investment, he is less likely to have a firm conviction about his investments, and is more likely to sell at a loss if things don’t go his way immediately. The solution to all of these challenges is to work more, to have more to invest in the first place, or to study more so that wise decisions are made.
The other challenges are to avoid mis-information. The little guy reads that he’s not supposed to try and time the markets, when, in fact, he can, and should. He’s told he can’t “beat the street” when, in fact, he can, and should. He’s told he needs to invest in “safe” bonds, when they are the most risky thing out there, and guaranteed losers now days. I hate how the system takes advantage of the little guy, and my goal is to expose such frauds, and help you succeed.
My personal advice is that every person ought to have debts paid off first, before investing. Next, a beginning investor ought to have a personal cash reserve of $1000, to $3000, or about a month’s living expenses. Then, for any money on top of that, the next $3000 to $10,000 should be put towards buying physical silver, or about 1-3 month’s living expenses. Finally, for the next $2000, which is money on top of the cash reserve, and silver pile, that such “extra”, if it is felt that it can be invested, and not needed, for at least 2 years, can be placed with a broker to buy stocks. But only after doing substantial research into many stocks; at least 5 stocks, and spending at least 1-2 hours studying each company; reviewing financial reports & historical price charts, and then picking the best one, by using your own good judgement.
Let me share with you some examples of my failures and successes, to show how great growth is possible (if only on a small level).
I first heard of Mines Management (MGN) when I read a press release that said they acquired a property with 261 million ounces of silver. But the stock price was about $.25/share, and the market cap was about $1 million, and I avoided investing because I thought the company was “too small”. Big mistake! The stock is now at about $8/share! Fortunately, I bought some at about $1.
I first heard of ECU when it was at $.08/share. I even included mention of it in my very first silver stock report comparative analysis. But I did not buy because I thought, the company is just “too small”. Big mistake, as I never bought any! The stock is now at about $2/share!
I first heard of Huldra Silver when it was under $.20/share. And yes, I didn’t buy because, again, I thought it was too small, and I wrote about that one too. Another mistake; I never bought any. Huldra is now at $1/share!
Now, a few successes:
I picked DROOY at $.67, right at the bottom. Stock went up just above $6/share.
I bought CZN at $.11, again, right after the bottom. Stock went up past $2. (Sold at $1.30)
I bought SRLM.PK at $.55, and the stock went to $14. (Sold at $10) (Repurchased at $4.)
I bought IGMI at $.40, and the stock went as high as $4, and believe it has more room to go.
I bought SVG.V at $.10, and the stock recently hit $.90, and it’s just getting started.
I say this not to brag. I just want to encourage you that such growth is possible.
I think only one of those companies had a market cap more than $100 million at the bottom. The average size of the market cap for each of those stocks at the bottom was probably less than $5 million (except DROOY)!
The company that I’m the most excited to own right now is a small one, about $30 million market cap, and I make no apologies for promoting a small market cap company. After all, that’s where the growth is, and these are the stocks that people want to own. I’m excited because this company drilled up 60% copper over 13.5 feet, and 41% copper over 27 feet. That’s the kind of discovery that can lead to 100 fold growth returns, and may help this stock go from about $2.50 share today to maybe about $10-20/share within a year. I wrote a bit about copper and this company here:
I'm still reserving the name of this company for customers who subscribe to look at my portfolio.
Smaller opportunities are only available to a fewer number of people. That’s just the way it works in a world where it’s “first come, first served”. And because this company is small, big money managers won’t buy this stock at the moment; it’s too small for them, but probably not too small for you. Bigger money may buy after more drilling, and after the market cap well exceeds several hundred million dollars.
There is perhaps one other rule that’s better than “smaller things grow faster”. This other rule is: “Sell the things you own that will likely go down in value, and buy the things that you are most confident that will go up in value.” If you know of another stock better than my copper stock, please let me know, and say why. I’ll analyze it, and if it’s really good, then not only will I buy it, but I will tell you all about it in a future email!