If you’ve studied the history of markets, you know that sentiment can turn on a dime.
Whether it is an unexpected wake-up call like the collapse of Lehman Brothers, or simply the popping of a bubble that’s blown too big, the tides can shift in a matter of hours or days.
No one knows this better than the world’s most elite investors – and that’s why billionaires like Warren Buffett, Ray Dalio, Bill Gross, Paul Tudor Jones II, and Carl Icahn take the necessary precautions available to protect themselves from these big and unexpected market swings.
5 Risks That Keep Billionaires Up at Night
Today’s infographic comes to us from Sprott Physical Bullion Trusts and it highlights some of the potential market risks that could move markets, as well as how these elite investors are hedging to protect their fortunes.
While these are all market risks that billionaires are concerned about, it’s worth mentioning that these kinds of events are almost impossible to predict or forecast.
Despite the unlikelihood of them occurring, they all have the potential to impact markets – and that’s why elite investors are always active in hedging their investments.
A Note on Net Worth
Why are billionaires so concerned – after all, don’t they have lots of cash to protect themselves?
It’s worth noting that on a relative basis, billionaires often aren’t very liquid at all. In fact, the majority of their net worth is usually tied up in business interests or other investments, and the value of these assets fluctuate with the market.
That means a big market movement could wipe out millions or billions of dollars in the span of hours. For an extreme example of this, just look at Mark Zuckerberg, who saw his net worth plunge $6 billion in just one day in the wake of his company’s most recent privacy crisis.
The 5 Big Market Risks
Here are the risks keeping the world’s most elite investors up at night:
1. The Return of Inflation
Have central banks mastered monetary policy- or is there a chance that inflation could come back with a vengeance? After trending down for decades, billionaire Carl Icahn says that creeping inflation could lead to higher interest rates, which he thinks would be “difficult to deal with for the market”.
2. Record High Debt
The most recent number for global debt is at $233 trillion, and about $63 trillion of that is central government debt.
Bill Gross, the “Bond King”, says that our system is dependent on leverage, and the critical values that affect this are debt levels, availability, and the cost of leverage. He said in a recent interview that “When one or more of these factors deteriorates, the probability of the model’s success and stability go down”.
3. Bond Market Worries
Last year, 84% of investors said that the corporate bond market was overvalued – and 82% said that the government bond market was overvalued.
In a recent interview, hedge fund billionaire Paul Tudor Jones II predicted a price plunge, saying that “Bonds are the most expensive they’ve ever been by virtually any metric. They’re overvalued and over-owned.”
4. Geopolitical Black Swans
Elite investors continue to worry about geopolitical surprises that could impact markets, such as a trade war with China. We looked at this broad topic in depth in our previous infographic on geopolitical black swans.
5. Overzealous Central Banks
Lastly, many world-class investors are also concerned about the unintended aftereffects of massive central bank programs in recent years. With $13 trillion in total QE pumped into global markets since 2008, investors are worried about how much room that central banks have left to maneuver in a situation where the central bank “tool kit” is needed.
How to Avoid Common Mistakes With Mining Stocks (Part 5: Funding Strength)
A mining company’s past projects and funding strength are interlinked. This infographic outlines how a company’s ability to raise capital can determine the fate of a mining stock.
A mining company’s past projects and funding strength are interlinked, and can provide clues as to its potential success.
A good track record can provide better opportunities to raise capital, but the company must still ensure it times its financing with the market, protects its shareholders, and demonstrates value creation from the funding it receives.
Part 5: The Role of Funding Strength
We’ve partnered with Eclipse Gold Mining on an infographic series to show you how to avoid common mistakes when evaluating and investing in mining exploration stocks.
Part 5 of the series highlights six things to keep in mind when analyzing a company’s project history and funding ability.
View all five parts of the series:
- 1. Common mistakes made with the team
- 2. Common mistakes made with the business plan
- 3. Common mistakes with the jurisdiction of the project
- 4. Common mistakes with the project and technical risks
- 5. Common mistakes with raising money
Part 5: Raising Capital and Funding Strength
So what must investors evaluate when it comes to funding strength?
Here are six important areas to cover.
1. Past Project Success: Veteran vs. Recruit
A history of success in mining helps to attract capital from knowledgeable investors. Having an experienced team provides confidence and opens up opportunities to raise additional capital on more favorable terms.
- A team with past experience and success in similar projects
- A history of past projects creating value for shareholders
- A clear understanding of the building blocks of a successful project
A company with successful past projects instills confidence in investors and indicates the company knows how to make future projects successful, as well.
2. Well-balanced Financing: Shareholder Friendly vs. Banker Friendly
Companies need to balance between large investors and protecting retail shareholders. Management with skin in the game ensures they find a balance between serving the interests of both of these unique groups.
- Clear communication with shareholders regarding the company’s financing plans
- High levels of insider ownership ensures management has faith in the company’s direction, and is less likely to make decisions which hurt shareholders
- Share dilution is done in a limited capacity and only when it helps finance new projects that will create more value for shareholders
Mining companies need to find a balance between keeping their current shareholders happy while also offering attractive financing options to attract further investors.
3. A Liquid Stock: Hot Spot vs. Ghost Town
Lack of liquidity in a stock can be a major problem when it comes to attracting investment. It can limit investments from bigger players like funds and savvy investors. Investors prefer liquid stocks that are easily traded, as this allows them to capitalize on market trends.
- A liquid stock ensures shareholders are able to buy and sell shares at their expected price
- More liquid stocks often trade at better valuations than their illiquid counterparts
- High liquidity can help avoid price crashes during times of market instability
Liquidity makes all the difference when it comes to attracting investors and ensuring they’re comfortable holding a company’s stock.
4. Timing the Market: On Time vs. Too Late or Too Early
Raising capital at the wrong time can result in little interest from investors. Companies in tune with market cycles can raise capital to capture rising interest in the commodity they’re mining.
Being On Time:
- Raising capital near the start of a commodity’s bull market can attract interest from speculators looking to capitalize on price trends
- If timed well, the attention around a commodity can attract investors
- Well-timed financing will instill confidence in shareholders, who will be more likely to hold onto their stock
- Raising capital at the right time during bull markets is less expensive for the company and reduces risk for investors
Companies need to time when they raise capital in order to maximize the amount raised.
5. Where is the Money Going? Money Well Spent vs. Well Wasted
How a company spends its money plays a crucial role in whether the company is generating more value or just keeping the lights on. Investors should always try to determine if management is simply in it for a quick buck, or if they truly believe in their projects and the quality of the ore the company is mining.
Money Well Spent:
- Raised capital goes towards expanding projects and operations
- Efficient use of capital can increase revenue and keep shareholders happy with dividend hikes and share buybacks
- By showing tangible results from previous investments, a company can more easily raise capital in the future
Raised capital needs to be allocated wisely in order to support projects and generate value for shareholders.
6. Additional Capital: Back for More vs. Tapped Out
Mining is a capital intensive process, and unless the company has access to a treasure trove, funding is crucial to advancing any project. Companies that demonstrate consistency in their ability to create value at every stage will find it easier to raise capital when it’s necessary.
Back For More:
- Raise more capital when necessary to fund further development on a project
- Able to show the value they generated from previous funding when looking to raise capital a second time
- Attract future shareholders easily by treating current shareholders well
Every mining project requires numerous financings. However, if management proves they spend capital in a way that creates value, investors will likely offer more funding during difficult or unexpected times.
Wealth Creation and Funding Strength
Mining companies that develop significant assets can create massive amounts of wealth, but often the company will not see cash flow for years. This is why it is so important to have funding strength: an ability to raise capital and build value to harvest later.
It is a challenging process to build a mining company, but management that has the ability to treat their shareholders and raise money can see their dreams built.
How Every Asset Class, Currency, and S&P 500 Sector Performed in 2020
The markets were volatile but offered great opportunity in 2020. See how every asset class, currency, and S&P 500 sector performed over the year.
How Every Market Performed in 2020
It has been a volatile year for financial markets and their participants, with some of the largest price fluctuations imaginable across just about every single asset.
Despite the volatility, the combination of the Federal Reserve’s early stimulus interventions and positive vaccine news has rewarded dip-buyers and strong hands.
Along with visualizing the returns across asset classes, currencies, and S&P 500 sectors, we’ve included their maximum drawdown for the year—the drop from the 2020 open to the 2020 lows—along with the recovery from 2020 lows to the closing price.
This helps visualize 2020’s most resilient assets, along with the strength of their recovery.
Markets Roundup for 2020
Of all the major asset classes, precious metals provided the best returns last year.
- Gold finished the year up 24.6%, but down from its all-time highs of $2,075/oz achieved on August 7th.
- Gold was also a resilient asset. Thanks to its strong start in January (4.8%), when March came around gold held up and only fell 4.4% below the yearly open.
- Silver’s performance over the year was also sterling, offering investors 47.4% returns despite a -34.7% pullback in March.
Here’s a look at how all major asset classes performed over the course of the year:
|Asset Class||2020 Return||Asset Type|
|U.S. Small Caps||18.5%||Equities|
|U.S. Corporate Bonds||9.7%||Bonds|
|Europe, Australia, Far East||5.1%||Equities|
|U.S. Real Estate||-8.4%||Real Estate|
U.S. equities and emerging market equities had double-digit returns despite the tumultuous year. Small cap stocks in the Russell 2000 outpaced the S&P 500 by 3%, but also saw a steeper drawdown during times of volatility.
Although there were some wild drawdowns in 2020, nothing compared to the drop into negative prices for WTI crude oil that occurred in April. Futures traded all the way down to -$37.63 a barrel when travel cancellations brought oil demand to a standstill and supply cut agreements weren’t reached by OPEC members.
U.S. government and corporate bonds had a positive year, however their returns were primarily driven by support from the Federal Reserve’s monetary policy and market operations. The Federal Reserve increased its portfolio of Treasury notes and bonds by 79% since March, with its total assets reaching $7.3 trillion at the end of 2020.
Performance by S&P 500 Sector
Unsurprisingly, the energy sector was hit the hardest last year, with value sectors generally struggling to perform compared to growth sectors.
Information technology continued to outperform like in 2019, with Amazon (76%), Apple (81%), and Netflix (66%) the three best performing FAANG members. Other tech stocks like Nvidia (121%), Paypal (115%), and AMD (100%) comfortably sailed to new all-time highs with triple-digit returns for 2020.
As the communication services (21.3%) and consumer discretionary (32%) sectors also performed well, the latter saw the biggest bounce from the lows of any S&P 500 sector (96%).
Foreign Exchange Performance in 2020
Early on in the year, major currencies generally followed similar patterns as they all fell against the U.S. dollar in March’s flight to safety.
The Swiss franc was one of the most resilient currencies, drawing down only -2.1% from the 2020 open. It was also one of the best performers at the end of the year alongside the euro and Australian dollar with gains of 9% or more.
Timing the dip on the Australian or New Zealand dollar was the most rewarding opportunity for forex traders last year. Meanwhile, the Indian rupee, Mexican peso, and Russian ruble weren’t able to claw back the points they lost in March, with the ruble seeing double-digit losses.
All eyes have been on the U.S. dollar’s free-fall downwards since it spiked up in March, and as the Biden administration prepares to take office, speculative traders have returned to selling dollars.
Winners and Losers of 2020
The COVID-19 pandemic largely defined many of the winners and losers of 2020, as did the Federal Reserve’s expansion of the U.S. money supply.
Zoom became an essential communications service in lockdown and Moderna and Novavax shares skyrocketed in valuation as they announced their COVID-19 vaccines.
Bitcoin broke well beyond its previous all-time high, returning just over 300% from the 2020 open and more than 650% from the lows. Tesla had an even more spectacular run, returning 745% and making Elon Musk the second-richest man in the world.
Meanwhile, as global travel quickly came to a halt last year, Carnival Corporation (the world’s biggest cruise operator) and Air Canada suffered double-digit losses along with WTI crude oil and much of the energy sector and travel industry.
Vaccine rollouts and the U.S. stimulus bill are the current known-unknowns that the market is pricing in for this upcoming year, and investors will be watching to see if the dollar’s downturn will be reversed, or if the world’s major reserve currency will continue to decline in 2021.
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