Editor's note: You can't protect your portfolio without a great defense...

Many investors have been hiding their money on the sidelines over the past few years as a result of sky-high inflation, heightened geopolitical tensions, and global supply-chain issues weighing on the markets. But you can still find great opportunities amid this market turbulence while protecting your wealth...

That's why Gold Stock Analyst analyst Garrett Goggin says folks must learn how to invest defensively in order to protect their portfolios throughout this bear market.

In today's Masters Series, adapted from the September 2022 issue of Gold Stock Analyst, Garrett discusses the importance of applying a defensive investment strategy to your portfolio... details how to identify high-quality defensive assets... and shares how you can implement this strategy amid today's market turmoil...

Defense Wins Championships

By Garrett Goggin, analyst, Gold Stock Analyst

I can still see the lick he put on Joe Ferguson out in Detroit... I thought he'd killed him.

That's former football coach Mike Ditka talking about the team that put him in the Hall of Fame... and recalling an especially memorable play...

When the Chicago Bears arrived in Detroit for the last game of the 1985 season, Ditka's team was 14-1. Their spot in the playoffs was assured, and the Bears were looking ahead to a playoff run that would ultimately end in a Super Bowl championship. No one would have blamed them if they rested their key players. Most teams would, especially against a forgettable opponent like the 7-8 Detroit Lions.

But not the Bears.

When Lions quarterback Joe Ferguson lined up to start the game, he stared out at a Bears defense loaded with future Hall of Fame players like Mike Singletary, Richard Dent, and Wilber Marshall – all poised to explode into action and chase him down.

On the third play of the game, linebacker Marshall laid a thunderous hit on Ferguson's chin. The quarterback went sprawling backward and lay limp on the ground for several minutes as trainers huddled over him. Ferguson eventually walked off the field, but his afternoon was done.

In an NFL Films documentary, linebacker Singletary recalled being on the field after the hit, listening to his teammates "barking" about who was going to be the next guy to hit Ferguson. "And I'm looking at these guys and I'm saying, 'Wait, wait, wait. The guy is bleeding at the mouth, the guy is bleeding at the nose. You don't have to kill the guy,'" Singletary said. "We don't care. He's the quarterback. We're going to get him. That's what we do."

That was exactly what the '85 Bears did all season.

They were a legendary team, built on the best defense in NFL history. (Apologies to the Ray Lewis fans in our publisher's Baltimore headquarters.)

Nicknamed the "Monsters of the Midway," they led the league in fewest points allowed and fewest yards allowed. They collected 34 interceptions and recovered 20 fumbles. And Joe Ferguson was just one of the 64 quarterback sacks they tallied. In one three-game stretch in November, the Bears defense scored more points than it gave up.

In the playoffs, the Bears shut out their first two opponents and allowed 10 points against the New England Patriots in the Super Bowl. Including the playoff games, 14 out of 19 teams they played scored 10 points or less against the Bears.

We're sharing the Bears' story because this reminds us of the basic fact that defense wins championships, not offense.

Glamorous quarterbacks and explosive offenses are fun to watch. High-scoring teams get all the attention from fans and media. However, the record books are full of teams that lit up the scoreboard and then fizzled in the playoffs.

Very few Super Bowl trophies were won by teams with shaky defenses. Good defenses hold down the damage an opponent can do, and they make sure that when their team gets the ball back, they're in a position to succeed.

You should think about your mining portfolio the same way...

Sure, everybody gets excited by the huge gains possible from small leveraged mining stocks. That's the fun stuff – the offense. But few people win by emphasizing those kinds of stocks.

Instead, you want to build your mining portfolio with stocks that will minimize the damage when gold and silver prices are struggling. And those same high-quality miners are the ones that will be best positioned to prosper when the bull returns to the precious metals sector. That's what we do at Gold Stock Analyst (GSA).

So today, I will describe how we've structured the Fave 5 portfolio of silver stocks with defense first to help protect your portfolio when silver's price is falling... and explain why our strategy has positioned us for big profits when silver stocks begin to rebound.

Most investors get involved in the sector when they believe silver is going higher. These newbies want exposure to the most highly leveraged silver play available because that should give them the biggest pop when silver rises to the moon. As a result, their portfolios are filled with lower-grade and higher-cost silver explorers, developers, and producers.

Since these risky bets are barely profitable (if at all), that means that when silver rises, their profits and total asset value can double, triple, or soar even more from their low initial levels. The stocks quickly follow, often rising multiples.

But most of these silver stock investors never consider the other side of the equation: what happens when silver drops or even treads water.

In those cases, reckless investors are stuck with a portfolio of money losers. Liabilities grow with no profits to pay them down. Equity value quickly falls to zero. Without the ability to turn a profit, many mining projects are liabilities, not assets. One needs to pay property taxes to hold acreage, management needs to get paid, and lawyers must be compensated.

This cash drain turns working capital negative and leaves the company teetering on the brink of insolvency. Think of these companies as leaky buckets. With more expenses than income, the bucket quickly drains and needs to be replenished over and over. Shares outstanding rise exponentially, and share prices fall toward zero.

This is why GSA doesn't base its investment strategy on predictions about where gold and silver are heading.

Yes, we believe prices will rise. But if you base your investment decisions on the belief that gold is going to reach $3,000 and that silver is going to reach $50 tomorrow... then you are setting your portfolio up for destruction.

You would hold the most highly leveraged companies in the sector. These companies are the least profitable, carry the most debt, and are closest to bankruptcy. If you are right in your timing, your bet on a once-in-a-lifetime occurrence stands to do well. But if your timing is off and silver does nothing or falls, which is much more likely, your portfolio will get decimated.

Remember, if a stock drops 50% and then rises 50%, your investment isn't back to zero... You are still down 25%. And it's mathematically possible for a stock to decline 50% a year in perpetuity. And believe it or not, some of these silver miners do just that.

Look at leveraged Coeur Mining (CDE). The North America-focused miner traded for a split-adjusted $360 per share in the 1990s. Today, it trades around $3 a share – a decline of 99%, representing an average loss of 15% a year. Coeur owes almost $500 million in debt and has a trivial $3 million in stockholder equity. Further, the company has had more than $3 billion in losses.

It is of the utmost importance to your portfolio to avoid these miners. GSA does the research to separate the good ones from the leaky buckets.

These leveraged miners can't grow profitability in new ways. They're not like Apple (AAPL), which can spend money on research and development and invent the iPhone or the iPad... and then release a new version with different colors the following year, exponentially increasing sales for minimal research spend.

That's not how mining works. The greatest value is created in the exploration stage. Finding a rich deposit is extremely rare, but if an explorer succeeds, company value rises from near zero to hundreds of millions of dollars overnight. But you are betting on a lightning strike.

A portfolio of small bets on 100 leveraged mining plays could see 99% of them fall to zero over time. That 1% could make a discovery and drive its share price 10X higher. But that one 10X winner is unlikely to make up for all the other losses. That's why building a great defense is critical for your portfolio...

As an investor, you need to seek out the companies that have assembled a collection of the highest-quality assets possible – just like great football teams pull together a roster of talented players.

Grade is one of the most important variables in our research. Lesser silver companies operate lower-grade mines that suffer from higher costs and are run basically at breakeven. Management gets paid, but shareholders suffer. No excess cash is generated to produce any shareholder value. Over time, cash runs low, shares are sold, dilution occurs, and shareholders suffer as the share price declines.

On the other hand, high grades lead to low costs... which lead to strong margins. You need to invest in those miners with the largest margins. These higher-grade producers generate significant free cash flow ("FCF"), which they then use to build shareholder value through share buybacks, smart capital allocation, and the payment of dividends. Profits continue whether the price of silver is high or low. Losses and dilution are avoided.

Fave 5 stocks enjoy off-the-charts grades, so their margins are wide compared with the average miner. When silver prices begin to move higher, Fave 5 margins will expand further, leading to more profits to drive shareholder value.

The last attribute we look for in mining stocks is speed. We want projects that offer a quick payback on their capital investments. The faster you can get your original investment back, the better. Everything beyond the original capital expenditures ("capex") spend is profit used to enhance shareholder value. The more, the better.

This is the key to investing defensively... The Fave 5 quality miners should remain profitable throughout a downturn, and the share counts should remain stable. Lesser miners with average projects lose money and sell shares, so when profits resume, lower earnings are generated per share. The inferior miners can never catch back up as their share prices will lag forever.

Downturns in the silver market are inevitable and unfortunate. However, when silver resumes its climb, Fave 5 profits will explode... Significant shareholder value will be created... And stock prices will leap higher, supported by booming FCF, share buybacks, dividends, and smart capital allocation.

Since the GSA Fave 5 has a big, strong, and quick defense managed by great leaders – measured by grade, margins, and payback – shares outstanding have remained constant. Profits per share will rise higher than ever, and the stock prices will follow.

Good investing,

Garrett Goggin

Editor's note: With gold recently hitting a new all-time high, now is the time for investors to start preparing for a new gold bull market...

That's why Garrett just teamed up with Gold Stock Analyst editor John Doody for an online event to reveal how investors can seize this rare opportunity in gold right now. Plus, you'll see the inner workings of the gold system John spent his career building. Click here to learn more...