Eggs: meet Basket

So where was I... Sprott Canadian Equity Fund (SCEF) was making me incredible returns from 2003-2007. I had also diversified into their Precious Metals/Gold fund and Energy fund, which really wasn't diversifying because SCEF had basically had become equivalent to half of their Precious Metals fund and half of their Energy fund. In fact, I believe SCEF now has to be classified as a precious metals fund due to the amount of gold bullion and precious metals content.

Anyway, in late 2006 I was continually reading articles from Sprott and other trusted sources predicting the upcoming U.S. housing market crash, possible financial meltdown, and almost guaranteed U.S. recession (all of which came true). Sprott and others were going on and on about how gold and silver were the only safe havens, and how gold, then at $600, would soon skyrocket over $1000. I decided it was time to take another plunge to hopefully protect myself and make a killing in the process. So in early 2007, I borrowed a whole shwack of money again and invested it all in the Precious Metals fund.

So now I pretty much had everything in gold and energy. While all my eggs were pretty much in one basket, I couldn't see anything else worthwhile to invest in; diversification wasn't an option. But I also didn't want to sit on the sidelines in cash. And I was somewhat correct as it turns out, there weren't really any good investments the last year (as far as "long" positions go).

I was unprepared for what happened next. Gold did move according to plan: in one year the price of gold went from $600 to $900 (and at one point over $1000). However, gold stocks went down about 10%. I couldn't believe it. But that was just the tip of the iceberg. They gradually went down more, and then the whole recent subprime/financial crisis hit. So I thought, "good, my gold stocks will pay off now". But as the financial stocks started plummeting, eventually the whole market and world markets crashed 20-40% at the beginning of October. The gold stocks that I thought would save me came down even harder, and energy stocks even worse than gold. I thought I was prepared for this, thought I was protected. Looking back, I feel pretty stupid for underestimating what a market crash can do. SCEF is down about 40% YTD, and the precious metals fund is down about 50% YTD. I've lost a lot of eggs -- on paper.

Now, I don't blame Sprott at all. Their overall call was correct. In fact, Eric Sprott has always been so bearish that he's never recommended anyone investing in his long-only mutual funds! Seriously! Even though his mutual funds had performed better than his hedge funds to date, he always recommended the hedge funds, which could hold short positions, which he felt was needed to add protection in this secular bear market (and lo and behold I believe the hedge funds are anywhere from only -10% to break-even YTD). I knew that Sprott was short on all the financial stocks. If I truly believed what they were saying, I should've had some short positions. I didn't want to get into shorting or buying put options though, so never gave it a second thought. If I would have done my research though, I would have discovered that there are great inverse ETF products out there -- leveraged ones too (e.g. SKF or SDS), which basically allow you to short various indices without actually shorting. I already had plenty gold; I shouldn't have bought more. I just didn't see the other angle that I could attack from. Oh well, lesson learned, and now I know about all these great ETFs out there.

I still trust my holdings in Sprott -- they've had big losses before and have recovered. They know what they're doing, and their responses in conference calls to the recent horrible performance have been very re-assuring and encouraging. I do believe gold is poised to skyrocket again and that gold stocks shouldn't go much lower, so there's no point in selling now near a bottom.

With the markets having dropped so much and everything getting so crazy volatile (record one-day gains and losses in the DOW being broken every week), I felt there was a lot of opportunity out there that I didn't want to miss out on. Mutual funds are not nimble enough to be able to fully participate in some of the short-term opportunities. So the itch to begin some stock trading set in...