Frequency of "significant and major discovery" announcements on Australian stock exchange (ASX) has spiked significantly in the last 2 years. Now at all time high since 2010!
What is driving this increase and most importantly can you profit from these discoveries as an investor?
Could increase in capital be the key factor explaining increase in the discovery announcements?
Spend on mineral exploration is rising in Australia. It doubled since the bottom in 2016. We are however, nowhere near the exploration spending top that we have seen in the previous commodity bull market of 2010-2013. The increase in "significant or major discovery" announcements could be also attributed to much bigger focus of investor relations and social media in 2022 vs 2012. As geologist, I observe that many of "discovery" announcements are used as a promotional events.
How much can you profit by holding discovery announcements for 1 year?
If you invested 100K AUD into each of 110 ASX discovery announcement containing "significant" or "major" discovery between 2010-2021 and held them for 1 year, you would have made 4.06 MAUD in profits. Sounds great right?
In April 2014 your strategy is 500K below water. You get up in the morning to make a strong cup of coffee and smash another 100K on the table on the next "significant discovery". The investment you just made will go on to lose 98.8% of its value over the next 12 months.
So where does the 4 MAUD in profit come from? Your 10 best investments alone will have produced all of your profits with an average return of 412 %. The best one yielding 791%. The other 100 will only break even. Its a game of catching the long tails.
This work is based on our in-house stock database built in Google BigQuery, which covers +160K instruments over all asset classes and 29 countries. We only share the glimpse of the results, as most of the work is proprietary. If you interested to learn more we do provide paid consultancy services.
Can you build better strategies around discovery announcements?
In Equivest we are working to combine exploration geologist skills and quantitative trading to separate the winners from losers. We built a strategy with 30% return per trade with a 70% win rate. The strategy would have generated over 800% return between 2020-2022. The strategy was also profitable during the 2022. Things can and will go wrong between backtesting and actual trading. You can follow us on Twitter and Blog to see if we succeed.
This article is for educational purposes only and nothing should be constituted as an investment advice. For financial advice please make sure to consult accredited financial advisor.