If I could start again: Peter Epstein

Anyone who plays with the public markets thinks they know enough to make big gains, but the ups and downs of trading can serve as a stark reminder that you’re never finished learning.

In Equity.Guru’s If I Could Start Again series, we talk to some of the savviest investors and analysts and newsletter guys around and ask them what mistakes they’ve made, what their big wins have been, and what they’d do differently if they could start from scratch with $1000 in their hand.

PETER EPSTEIN is a New York-based analyst who runs EpsteinResearch.com, focusing on the resources sector but by no means restricted to that.

We asked him to tell us about how he got into the business:

peterepstein

My first foray into investing was, without doubt, as a kid in the 1970s. I invested in baseball cards. I amassed an empire worth US$5k. The investment returns were double digits, but then again, so was inflation! The skill was to buy cards of rookie players, “rookie cards,” that turned out to be stars. A lot like buying shares of early-stage miners, but way easier. Returns on strong rookie player cards were routinely 100%+ over a 1-2 year period.

What was your personal investing highlight?

My biggest score is obviously still ahead of me. Looking back, I made some coin in the dot.com bust acquiring distressed bonds of Telecom companies. Returns were 5x-10x on the best ones. I bet on real companies that got caught up in the Internet craze, guilt by association. It was intoxicating to have high conviction in these distressed bonds and be right. My career as an investor, like many, has been downhill ever since.

What were your worst investments?
Wow, how to choose…. I’ve had several natural resource companies cease to exist on my watch. Those sectors are very high risk / return. Until about six months ago, natural resource stocks suffered through a 4-5 year bear market. Try telling your wife that all of the family’s stocks are down year after year while the S&P 500 hits new highs!
It was the opposite of intoxicating to have high conviction in various companies and natural resource sectors and be utterly wrong. Back in the day, many believed that, on a national level, housing prices would never decline year-over-year. Enter stage right, “The Big Short.”

For me, natural resource company management teams have been the bane of my existence. I continue to believe that 84.67% of the time they speak the truth, but that estimate of truthfulness has proven to be way too high. Not all of them are lying to me, but there are a lot of guys who are drinkers of their own kool-aid. I routinely haircut a management team’s view of the future by a substantial amount and, even then, I’ve gotten burned again and again.

Which sectors have strong long-term to you?

There are several to choose from but it’s the companies in those sectors that matter. The green energy metals, high tech sectors? Yes. The viability of literally hundreds of early-stage graphite & lithium juniors?  Not so much…. 95% will fail. I happen to be backing a few of the winners.
Driver-less / autonomous / electric cars? Yes. Tesla, no. GM, Ford? They have rapidly growing electric car portfolios, but no multi-bag investment upside potential.​

 

How long do you hold on to a winner? Or a loser?

Successful selling is more important than buying. High risk, high volatility stocks can move higher by multiples, buy you can only lose 1 multiple, otherwise known as 100%. That’s not intuitive for some so, think about it. Selling losers is usually a shit show. Yes you sell too late or the stock bounces back somewhat the next day, but once one has given up on a stock, just sell it and buy your next big loser.

Do you average down?
Doubling down is both the best and worst idea ever. You do it right a few times and you’re master of the universe, only to be harshly dealt with the next time. There is such a thing as tripling, quadrupling, quintupling down. I’ve done it all. Come to think of it, (seriously) it never, never works. If a stock keeps dropping, one has to rethink one’s investment thesis. I tend to suffer from confirmation bias, I only read information and data that supports my view of an investment, which is obviously not a good idea.
Do you stick to your knitting or are you sometimes distracted by something outside your wheelhouse?
Sticking to knitting, a phrase not used in decades– youngsters will not understand. I am not morally against getting involved in a hot sector like lithium. My problem is that I might write about a stock a few times, have the company as a sponsor of my website, EpsteinResearch.com and then run into trouble…. the stock quadruples, then what?
It gets really, really hard to be positive on stocks once they’ve soared. Even if I have strong conviction that a stock still has a lot of upside, I expose myself to the possibility that the stock could collapse, calling my integrity into question. People will ask, was I just pumping the stock?
What’s more important, area plays, sector plays, people plays or resource fundamentals?
You know my answer has to be a definitive “it depends.” Sector rotation is a proven winner, if you pick the right sectors. The same can be said of asset classes, pick the right ones and your retirement account is golden. People plays has to be my real answer. And, not just picking the right team for a single investment, picking guys who I can ride the coattails of in future endeavours.
I just was emailing my best friend Paul Matysek. He’s got the hottest hand in the natural resources space. Today he sold his Argentinian gold junior at a huge premium. He has had 4 big hits in the past 15 years. Following him is very, very wise.
Full disclosure, he’s not my best friend. He wants to be, but I can’t be bothered.
Ever been tempted to put your knowledge to good use in the boardroom itself?
I have not joined any Boards or taken an executive role in any company. I do not want to deal with actual and potential paperwork. I don’t want to be tied up when I want to buy or sell the stock. It would be bad for my sponsorship model to favour one company in a sector….
Does someone starting in investing today have it better than you did?
A young person today getting into the market has 10,000 times more information at his fingertips. So, that can’t hurt. But, in the end it all comes down to who you know. Which management teams are legit, which industry “experts” are tied into the best sources of information, and of course a lot of selective disclosure of information happens all the time. If one has a meeting or phone call with a CEO, there’s no way around the fact that one will get information that’s not universally known, though most of the time that info is non-material.
That said, starting out anew, one does not have the network to make confident moves. And of course, most people have real jobs, they don’t invest for a living.
What is one important thing people don’t understand about investing in the public space?
Good stocks can go down in a bad market. Apple shares can go down a lot in a bad market. Things other than picking a stock are at play. A lot of things. Exogenous events. Also, non-professional investors typically do not envision a bad outcome. So, they experience a downdraft on a stock and sell, even if its a bad idea to sell. When asked, most people would say that they will be prudent in a sell off, sticking to their guns, but most people would do the opposite.
If you started again with $1000 in your hand, how would you play it?
I would play live poker at a casino. The odds are pretty good if you are a good player and you have maximum control on how things go down. Owning $1k worth of stocks, you would be hard pressed to make a lot of money, and you would be a passive investor, not an active investor like in a poker game.
Disclaimer: ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.

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