Quick update: I think we are still far from the bottom of the bear market. As such, you still should be building cash, through collecting dividends from your remaining share holdings and through interest on short term money market or savings accounts. Also, hang on to gold and silver – both physical and in ETFs such as CEF run by Sprott. If you are more risk on, have oil; gas and metal royalty companies such as FNV and further up the risk scale, own gold and silver mining stocks and other resource stocks. In general, don’t buy stocks or bonds. Just to be clear, I am not a personal finance professional; I only give you, just like in the remainder of this write-up my opinion.
Before the two most important employment benefits (employee stock options and the savings plan) that may help you reach your financial adulthood, I want to discuss petroleum stocks as it relates to the 6 stages of a commodity cycle. You may recognize these trends in any commodity industry, being petroleum, coal, gold, copper, etc. I will use in the petroleum industry – my favorite oil company CNQ as an example. The chart (stolen from FinanceCharts.com) from 2003 to 2013 covers the previous boom. If you haven’t read my previous post on the 6 stages of a resource boom click here.
The chart below shows when I joined CNQ around 2001 and received employee stock options. Basically, an option is the right to buy (call option) or sell (put option) a share at a fixed price (strike price) for a certain time period (which ends with the option’s expiry date). If you want to own such options (yes you consultants), for a company (e.g. CNQ) you admire then you can buy a long-duration call option for such a company through your (discount) stock broker. It is only an employee stock option because your employer paid for it (as part of your compensation). Hence it is very important to select the right employer because literally, your financial adulthood may depend on it. Do your research before taking a job!! It is not a job but an important part of your career – and you do not get everyday a commodity boom.
Around 2001, I started with CNQ and share prices did not go through the roof right away. Oil prices had already been improving for about 2 years before that and share prices seemed to go nowhere or, including up and downs, moved up slowly – call it stage 1 of the commodity cycle. Nobody is in a rush and if you bought shares too early, you may have, like during the Covid years, experienced first some serious losses. But you know where you are – in the early stages of the commodity cycle and nothing goes straight up; there may be a few false starts. But by 2003 – 2004, things moved in full swing and CNQ had more than doubled around that time. There was even a stock split. Don’t sell your stocks at this stage – people who do, will regret it for the rest of their lives, neither cash in your options. When close to expiry, pay your taxes, and convert the options into regular stock – use the cash build up in the savings plan to help with that. Or, in the worst case, sell part of the options and use the proceeds to convert the remainder into regular shares. Every year, based on your employment performance, your management may decide to ‘gift’ you more options. Be grateful and don’t whine. Including smaller ups and downs, your shares and options will go up until stage 4.
In stage 4 and 5 you must become more careful. You know your employer and how good management is by now. BUT nothing lasts for ever. Especially not in resources. The higher the share price the higher the risk! No kidding! With a regular stock holding in a portfolio, you do not invest more than 5% of the portfolio value in a single holding. But you know your employer better than most. Unless you think your management is just a ‘bunch of cowboys’, let your profits run. I let mine run to more than 30% of my net worth. But… If you no longer sleep well at night but held on up to this point, then start selling some until you once again are comfortable with your position. Now you may think you’re a genius around this time. YOU ARE NOT! you DUMBASS! 😊 You are just lucky. By this time, your Calgary house has also increased in value as well. Thank you very much. That is because Calgary real estate rises with oil prices. If you think you’re diversified with Calgary real estate; you are NOT! Your ‘net worth’ is very dependent on the oil industry and around stage 5, it is time to cash in. Use the profits, amongst other things to pay down the remainder of your mortgage. Time to buckle down! Because commodity shares are NOT for the long term! Stage 5 was somewhere in 2006-2007. We are NOT a buy and hold industry. Hardly anything is.
During the Great Financial Crisis, things were a bit strange as investors sold everything including the kitchen sink, they even sold their gold, oil and silver. There was an enormous panic, and the resource boom skipped a bit; then resumed the boom (in 2009) until 2011 when gold and silver finally peaked. A commodities boom can last, with interruptions (like in the 1970-1982 boom). That was my first commodity boom, and I knew nothing while starting my career in 1979. I experienced the last bit of the oil & gas cycle not until 1982, it nearly bankrupted me. You don’t sell your residence. I bought in 1979 my first condo and upgraded in 1981 to a single home, thinking I was a genius. Nearly went bankrupt during the subsequent real estate bust but held onto my residence to this today – including some upgrades it is now valued at $2 million if not more (tax free!!!!!). AND… my third commodities boom has barely started. You see the potential?
When hitting stage five, don’t become overconfident. Because really, you are not that smart you just ride a resource cycle! Start cashing out your stocks and options. Pay the bloody taxes – capital gains taxes are not that bad. And hunker down. Don’t sell everything in one swell swoop. Sell in portions of 10 or 15%. Depends again on whether you can sleep well at night. Keep your residence; pay off the mortgage or what is left of it. It is now secure for years to come. You will learn that it is NOT dead money. He/she who owns assets has options (I don’t mean stock options; but rather choices). Robert Kiyosaki on YouTube is very instructional but put wax in your ears when he starts talking about your residence not being an investment. It has been my best investments now for FOUR DECADES!
Stage 6 is the bad time. You will learn who the good managements are and those who once again over-levered and dunked their staff. No sympathy for the second type of management. By now you should own no petroleum stocks, probably your gold mines and nuclear investments are also in trouble. Possibly by then your job is gone as well – unless you worked with excellent management. By now, you should be financially adult and have learned also about investing and diversification. As an investor you always learn and improve. Your life has changed forever. 10 years or so, is all it took. Enjoy the stock splits