Understanding the Short-Term Top in Silver

Yesterday, silver experienced its biggest one-day dollar drop in 3 decades. In recent weeks, I’ve been warning that the downside risks in silver were huge, that silver rose too far, too fast, and that there was a frenzy developing in silver. I publicly stated I was lightening up above $46 dollars and that a minimum of a 30% decline in silver shares was very possible. I think enough of these things have come to pass that I can now speak from a position of strength about this recent craze in silver.

I don’t claim to have all the answers; I’m just trying to nudge you all to be objective and learn from your mistakes. If you unloaded silver near $50, great. If you went long instead, brush it off and try to figure out what you did wrong. Did you believe “this time is different”? Did you get caught up in the hoopla that there’s some kind of shortage in silver? Did you believe that the collapse of the dollar was imminent even though I noted that objective metrics like debt servicing costs as a percent of revenue were suggesting otherwise? If so, don’t continue believing in a flawed premise. That’s what the rookies do. That’s what the “professional” analysts do. We’re just trying to make smart decisions without any personal allegiance to any asset.

Everyone Has Two Choices

When I first started investing, I too got caught up in the hoopla surrounding whatever the popular asset was at the time. I suffered the hard way from not putting enough thought into my investments. In response to these errors, I did something absolutely shocking in this day and age: I learned from my mistakes.  I actually got angry that I screwed up. I spent hours in the bookstore learning and honing in on what I did wrong. Perhaps this reflects my nerd-like nature, but this is honestly what I did. And guess what? I’ve become a far better investor because of it. If I didn’t learn from my mistakes, I believe I would have a small fraction of the profits I do now.

How many people out there can honestly reflect on their mistakes without justifying their every action? I’m sure you all know someone who never admits fault. These are the type of people you just roll your eyes at; their mental maturation stalled at about the age of 12. Even at my age (27), most people I know are just set in their ways. Even now, people listen to what I say not necessarily because they are open-minded, but because my investing track record has been so good over the years. They may do well in investing, but in every other aspect of life, they are as close-minded as everyone else.

While investing in general is hard, investing at extremes is pretty easy. I’m slightly overgeneralizing here, but if over 90% of people think something is going to happen, the opposite is likely to occur- at least in the short run. Now understand that this doesn’t necessarily have anything to do with the validity of an investment thesis; it basically comes down to a question of who is buying.

When 90% of people are on one side of a trade, then a significant percentage of those people are just lemmings who chased the popular investment. The smarter speculators who bought in the middle of a trend take profits, which forces the latecomers to panic and sell. Next thing you know, you have a trend reversal. Simple. The reason it is hard for most people to invest in extremes is that it is human nature to mimic the action of others, especially when it is a strong majority. In most aspects of life, this is the proper course of action; in investing, it is dead wrong.

Now back to silver. I believe the bare minimum requirements for a correction have been met. If I had to hazard a guess, I would say this correction has more room to run. I’m just taking this one day at a time and adjusting to whatever the market gives me. Stay nimble and get ready to pounce when the opportunity comes.

Understanding the Short-Term Top in Silver is a post from: Expected Returns

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