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KMW Blog Jun 23, 2017: Cambridge International Letter Writers Conference: Visualizing Outcomes - May 29, 2017

Posted: Jun 23, 2017JK: Cambridge International Letter Writers Conference: Visualizing Outcomes - May 29, 2017
Published: May 29, 2017CH: Visualizing Outcomes: Could an "untrusted" Crowd outperform "trusted" Experts?

On May 29, 2017 I gave a presentation titled Visualizing Outcomes at the Cambridge International Metal Writers Conference in Vancouver. I discuss the communications predicament of resource juniors and their audiences, namely getting investors to understand the "Size of the Prize". The problem is that companies can only publish "dots" about what they are trying to accomplish, not "connect" them so as to make clear what success would be worth, unless done in the form of a 43-101 report signed off on by qualified professionals. The problem with that is it takes millions of exploration dollars and years to deliver an economic study. If one is to place a bet now, one needs to have a rough idea of the expected payout before it has become reality.

Promoters and industry professionals engage in "back of the napkin" economic geology all the time, but ordinary investors lack the technical skills and time to "connect the dots". This leaves them in a poor position to judge if the current stock price offers a good potential return for the "expected" outcome given the associated uncertainty. So how does a company get its own internal outcome expectations into the public domain?

Ironically this is not a problem for institutional audiences because 1) institutional investors can connect the reasonably reliable dots themselves, 2) out of principle they don't believe anything "forward-looking" the promoter says, and, 3) they generally are not interested in a resource project until at least a 43-101 compliant economic study such as a PEA has been published. To get the speculative number crunching done by an independent third party company promoters with projects not advanced enough for institutional audiences are forced to track down brokerage analysts and newsletter writers who do have the skills to "connect the dots".

Unfortunately brokerage analysts are constrained by the firm's "suitability" requirements, which is code for whether or not the firm stands to benefit monetarily from the analyst's research (ie "is this a corporate finance opportunity, and if it is, how low can we grind the financing price before we publish lofty expectations?"). Investment advisors, who usually are not allowed to publish their own research and are also constrained by the "client relationship model" implemented by the regulators to prevent "trusted experts" from exposing clients to high risk investment opportunities, are not the target they used to be. Not only does CRM limit the ability of brokers to function as gateways for stock promoters to investors, but the ubiquity of information in the internet age also prevents "rumors" from deluding investors into thinking they have an "inside track". If an investor has done homework on a junior, odds are that the investor knows far more about the company and its risks than the broker.

The Canadian regulators made a positive step when they invented the "existing shareholder exemption" to allow retail investors to participate in private placements like any accredited investor (ie somebody with a net worth of at least $1 million excluding equity in primary residence) except that the investment is limited to $15,000 per company per 12 month period.The "existing share ownership" requirement, however, limits the pool of potential retail investors to those who already own the stock and probably as much as they should own.The regulators should just do away with this restriction, but instead claim they dealt with it by allowing a retail investor to participate in a private placement if an investment advisor makes a judgement that participation is "suitable" for that investor. This is a sop to the full service brokerage sector because no broker is going to accept the risk of the investment turning out to be unsuitable (meaning it went went down instead of up) unless the private placement has been vetted by the firm, which will not be the case unless it is brokered and a conflict of interest in the form of a rich commission exists. If the private placement idea was not generated by the advisor the simple answer is "not suitable" because the broker cannot afford to spend an hour researching the company in order to be in a position to make a genuine suitability judgement.This waiver of the "existing shareholder" requirement is not a sincere attempt by the regulators to enable companies to raise capital directly from investors; it is a structure that imposes an extra fee burden on juniors trying to raise capital from retail investors and it shuts out companies unwilling to submit themselves to the will of the financial sector. It certainly does not help retail investors who are intelligent enough not to rely on a broker for advice on high risk ventures such as resource juniors and instead use a discount brokerage account where they take responsibility for their own decisions. The deregulation of commissions also discourages interaction between brokers and clients; the fee based asset management model is most lucrative when there is the least amount of interaction between advisor and client. It will be even more lucrative when brokerage firms replace the advisor with a robot. It is foolish for any regulator to include the financial sector when addressing the question of how to enable retail investors to invest capital directly in a junior. With brokers being marginalized by increasingly onerous "client protection" rules stock promoters must seek out independent network hubs such as letter writers.

The problem here is that there are very few letter writers knowledgeable about the junior resource sector. Some work as external appendages of cartels where their function is to give thumbs up to juniors backed by the cartels and thumbs down to those that are not. Some restrict their coverage to a few company groups they have come to trust over time. All of those who rely on subscription fee income face the problem that investors do not want to pay much for "recommendations" and quickly give up on the writer when markets are erratic or picks turn into a series of duds (just consider my predicament with stocks like Peregrine and InZinc where the story is good but management will or competence is lacking). Some end up relying on payment from the stock promoter, particularly if they have developed a mass audience that pays little or nothing to be on the list. Those who remain free of any conflict of interest other than owning stock purchased at market prices, and do not practice the sham of "reporting" to their subscribers what they personally did yesterday (front run their recommendation or dump their position before pulling a recommendation), face the task of allocating their analytical time efficiently. Nothing is so deadly as spending an hour interviewing a promoter only to realize that this story is not a good opportunity for one's subscribers. "Great, now I can add to the list of stocks that look like pieces of shit one that I know is a piece of shit. How many stories can one individual research per day? Between ASX and TSX/TSXV there are 2,000 resource juniors whose promoters are trying to persuade a handful of letter writers to listen to their story and write it up favorably. And even if this happens, the most one is likely to get is a prediction that the stock is going higher, a lot higher.

As far as media articles are concerned, the audience has become immune to puff pieces, and utterly blind to banner advertising on web sites.The latter should be no surprise. After two decades of internet advertising there are two groups left: 1) those who out of principle never pay attention to banner ads, and, 2) those who do and as a consequence have no money left to buy stocks. Some promoters hire independent marketing groups who have a dozen contracts at $5,000 per month on the go. One particularly bad group tricks stupid promoters into 12 month contracts that happen to match the amount the marketing group is putting into the company through a private placement. Once the private placement comes free trading the stock gets blown out so that the IR firm gets its investment back, doubles its money by collecting the monthly IR fee while it spends its real marketing efforts promoting the juniors where it has a "merchant banking" foothold, and rides the warrants as a free lunch.

Even at a conference where the field has been reduced to about a hundred companies the poor delegates have no idea where to begin, what to take away from a five minute chat with the booth person, and what to believe from a 20 minute workshop that usually offers generic wisdom because nobody is being paid to speak. Letter writers such as myself spend most of the conference time being buttonholed by promoters and over-saturated with information, much of which has drained out of my brain by the time I am home, and that which was taken down as notes requires an encryption key I no longer possess.

To deal with this frustration I now start any encounter with the question, how much money would I make if I buy the stock today and you succeed at whatever you are trying to accomplish? I do not phrase it quite that way. Instead, I ask the promoter to help me understand, what is the size of the prize the company is seeking. When the project is somewhat advanced the discussion revolves around what are the relevant dots and what is the best way to connect them to define the prize. When the project is earlier stage, the discussion is more along the lines what does the size need to look like to qualify as a prize. It is shocking how many promoters have not done any back of the napkin economic geology on their own project. There was one pair which pestered me to look at their project. The presentation had a table of good looking intersections that intrigued me. And there were pages and pages of sections for each hole. But there was no page with a drill plan showing the locations of the holes, though I suspect that with this pair if there was a drill plan it would probably be lacking a scale. If a promoter can quickly help me understand the size of a prize that looks plausible, then I become interested in the details supporting this visualized outcome. The regulators frown on this activity because dot connection by a corporate executive outside the 43-101 framework is forbidden.

That is why I came up with the idea of The Share Collective. It is an online platform which allows an investor to collect a bag of dots from a corporate web site, a show and tell, or even a telephone conversation where none of the "forward-looking" rules have been broken, connect them with the help of an online form that represents the variables needed for a simplified version of the discounted cash flow model, and push a button to generate an NPV outcome that can be translated into a future stock price target. This visualized outcome can be kept private, or it can be shared to the company's project node within the Share Collective. A project node is like a stadium where competing gladiators share their visualized outcomes on the arena floor, while a crowd which has chosen to follow the project operates as spectators expressing their sentiments toward the project, and chooses to follow the visualized outcome they prefer. My Cambridge presentation explains how the problem of visualizing outcomes for resource juniors can be solved through the Share Collective.


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