The razor sharp eyed among you will notice that despite my protestations about not buying Small Resources (Mining and Oil mainly) stocks, I have a few in my Portfolio - APF, EMED, POL, AUE. What’s going on?
OK, I screwed up. It’s that simple really. I have no one to blame but my retarded, idiot, self. I am taking responsibility - you won’t see much of this ‘mea culpa’ stuff on the QPP Bulletin Boards !!
But there is a lot more to it - there are some lessons here about how the Market (‘The Great Humiliator’ as Ken Fisher calls it) can trick us into dumb buying choices.
Luckily I tended to put only small amounts of money into these Small AIM listed miners - probably less than 1% of my Portfolio - I guess my Sense of Risk still helped me as I didn‘t get too carried away. Despite this, I lost a lot of money but it could have been much worse. There were several stocks like VGM, JLP, GPX, AEX where I lost pretty much 95% of my initial investment. OK, we are back to Stoplosses !! (see my earlier Blog).
In addition to this hit, you need to consider the ‘Opportunity Cost’ of putting money into these Resource plays, rather than other stuff.
The vast majority of my Investments in other sectors tend to work out - so when I say I did not lose too much to murder my Portfolio, I am neglecting the Opportunity Cost of not investing this cash in a Truly Great Stock - I imagine this Opportunity Cost is huge.
Mind you, I guess the biggest gain to me was in learning some invaluable lessons…..
How did it happen?
I am not sure really - but I guess the following factors were key to me buying these woofers:
- I made a lot of money on a few Resource stocks back in 2006/2007 - probably this was a result of Sheer Luck but foolishly I totally mistook it for my own Utter Skill - this led me to continue to buy such stocks in the 100% knowledge that I could never fail. Ooops…..An important lesson in Overconfidence.
- I have subscribed to t1ps.com for many years and generally I find it pretty good - but my naivety led me to blindly believe that Miners were good news because Tom Winnifrith was continually tipping them. Lucky for me I only put pretty small amounts into these stocks - at least I had figured out that they were high risk but I did not appreciate how bad they can be. It is also a lesson about Tipsters - they are not geniuses despite giving the impression they are - be warned. Tom W is strange in some ways - I have found that many of his Tips of normal companies (i.e. profits, sales, cash and such niceties) work out very well - but his Resources Tips were dire - he got it so wrong - and this killed his Fund Manager career. But I don’t want to criticise Tom W really - I have learnt an enormous amount from him about the sheer business of Investment - overall it is this ‘philosophical’ aspect of t1ps.com that has really helped me.
- I completely failed to understand how dependent Miners are on end Commodity prices. They are massively geared to Commodity prices - so a small drop in mineral prices can mean huge drops in Share Prices - this is an important lesson. Commodity Prices are inherently unpredictable - so buying Small Resources stocks is really gambling. It is certainly not ‘Investing’ in the proper sense.
- At the time, several of my Investing Buddies were messing about with miners as well - I suspect we were reinforcing one another’s over optimistic viewpoints on certain stocks - a danger of ‘Group Think‘. One of the factors exacerbating this was probably that many of my friends are very successful investors - we were all fooled.
- Broker recommendations and Analyst Reports are never Independent - invariably they are produced by House Brokers or the NOMAD (who are both working for the Resource Company) and it is their job to promote the stock - often because the Resource Company needs to issue more shares - dilution for existing shareholders. So they underestimate costs and overstate future gains - leading to lofty Target Prices - all designed to lure in the unsuspecting Retail Investor….
- You can read about a new Mining Stock and get the impression that they have found a huge Deposit of Gold and it is just a case of building some stuff and they can get digging it out - easy money !! I have now learnt the hard way that the route from finding a Deposit to getting it out is long and painful and nearly always extends much longer than the Company tells you it will take. The problems they encounter are unbelievable at times - I think stocks I have owned in the past have suffered many deaths from accidents, floods from tailings dams breaking, Hurricanes destroying infrastructure, monsoons, Terrorist attacks, and countless Legal and Permitting issues. This means huge extra costs and more dilution as New Shares are issued. It is key to think of early stage Resources Stocks as Share Issuing Machines…(this also applies to some small Producing stocks as well).
- It is not just exploration stocks either - even some of the more established Producers I have held have had countless problems - these things really are terrible investments on the whole in my view.
- Chris Dillow, the Economist in Investors Chronicle, often refers to a psychological concept called the ‘Availability Heuristic’. This arises where we are driven to Invest in a stock simply because it is close by and waving madly at us. Human Brains (and I suspect most Animal brains) are designed to be attracted to movement and things that are ‘happening’. This is very dangerous for Investors - as we get attracted to the exciting, big stories - which are probably the last thing we should invest in. We would be far more successful thinking in a Contrarian way a lot of the time I suspect. Anyway, the point is that this Availability Heuristic might have blinded me to the dangers of Resource Stocks. A great example of this is the Master Investor Conference in Islington every year. I have attended it for pretty much over a decade now, and every time I go the Company Booths are stuffed full of crappy miners - but the simple fact they are there draws people’s attention and we soak up the ‘Saleman’s Puff’ of the Directors as they paint glorious pictures of endless cash flows ahead of us.
- I also think the names of some commodities have a positive emotional aspect for us - the words ‘Gold’, ‘Silver’ and ‘Precious Metals’ have an inherent positive psychological and emotional feeling of wealth and riches for us - it is just Hard Coded into our psyche.
- The usual financial press, Investors Chronicle, Shares Magazine etc. were all gung ho for Resources stocks a few years back - this played into the Availability Heuristic problem. There were regular Front Covers on ‘Buy the Mining Boom’, ‘Oil on the up’ and suchlike……all very dangerous to Muppet Investors like me !!
- Directors of Resource Companies tend to paint a very rosy story - it is in their interest to do so. If they told us the truth, then no one would invest any money - and the fact is that these Small Resources Companies continually need to pass the Begging Bowl around for more cash - and the associated Shareholder Dilution. It is not necessarily the case that all Directors of these Companies are liars - some will be, but I suspect most are pretty honest, they are not obviously Bad People - it is just that they don’t tell us the negative aspects to the full extent.
- It is a sad paradox that the ‘Curse of Oil’ and similar valuable commodities means that many Resources Companies have to operate in very dangerous ‘Hot Spots’ of the world, where War and Terrorism is rife and Corruption is a way of life - not ideal places to operate in and it all adds to costs and Risk. For instance, I have a small amount of money in Gulfsands Petroleum (GPX) and it all went very well for several years - but then the Syrian Uprising kicked off and their Producing Oil Field in Syria was just too dangerous to operate at - so the shares just plummeted overnight. These risks mean companies have to spend a lot of money on Security at their sites and a peaceful situation can change extremely quickly into a Danger Zone.
Are all Resources Stocks woofers?
I don’t think it is fair to taint all Resource Stocks with this ‘Wheelie Bin - I Smell’ brush. I hold Glencore (GLEN) at present, having bought at IPO and being well out of the money on it. But it is a good divvy yield and as good as any of the Large Diversified Miners - especially since buying Xstrata. I recently bought more so my Average Entry price is not far off where we are now.
Big Miners - think BHP Billiton (BLT), Rio Tinto (RIO), Anglo American (AAL) etc. - are diversified across many geographies, metals, grains, oil etc. and have various stages of production - usually from building a mine to long established mines of vast size. They are great dividend payers and have recently all undergone management changes following a Capital Expenditure boom in 2008 or so, and consequently are being run more for Shareholder Returns - nice.
Large Oil Companies like Shell (RDSB), BP (BP.), BG (BG.) etc can be good investments at the right price.
Should Small Resource Stocks always be avoided?
I think extreme care needs to be taken - experience makes me wonder whether there is any point in buying Small Resource Stocks. Some people do very well and they sort of specialise in these kind of stocks and good luck to them. I think this is a key point - I see a lot of guys and gals who do very well on Resource Stocks - but it is very specialist and focussed, and you need to be committed and know what you are doing. Most people do not understand this. I certainly don’t.
For Long Term investors who probably work and have restricted time and may be just plain lazy and want to do minimal researching and analysis effort, Small Resource plays don’t seem to make much sense to me. Far too risky - in all respects, such as Volatility Risk, Bankruptcy Risk, Shareholders Dilutions etc.
For me, I will in future be very selective and most likely use a Stoploss if I do get tempted. The nub of the issue is why bother with the risk when there are so many other great stocks out there where you can make a relatively easy 50% in a couple of years with much less risk?……and you nearly always get a divvy while you wait.
I would lump Small Oil Stocks in with Small Miners and also some of the Food related stuff like Sugar producers and Palm Oil - you need to be extra careful. As a rule, anything that is actually producing the commodity (or maybe a couple of commodities) out of the ground is far more attractive and less risky as the Cash Flows from selling the stuff can finance more mine expansion and costs. But even Producers hit problems - especially if the Commodity concerned collapses in price, as they are prone to do.
In essence, the big problem with all Resource Stocks is that they are not in control of their End Prices to consumers - they are at the mercy of the market for the commodity. This applies to anything that is a ‘commodity’ - including stuff like Sugar, Coffee, Grains, Fertilizers, Rare Earths, etc. as well as Metals and Oil.
Other companies can set their prices according to the features of the product and competition. For instance, Rolls-Royce has considerable market power over its prices because there are very few Jet Engine manufacturers and many Rolls-Royce products are best in class.
It is worth noting that the Investing Legend Robbie Burns (The Naked Trader) never seems to buy a Mining Stock and only occasionally buys Oil Stocks and they tend to be on the larger side of things. He often plays the theme by investing in the ‘Picks and Shovels’ aspect - for example, the Oil Services Companies like Hunting (HTG), Petrofac (PFC), Cape (CIU), Lamprell (LAM), Fenner (FENR), Renold (RNO), etc.
I do notice that I seem to do a lot better with FTSE350 Oil Stocks than I do with Small AIM Resource plays………
That’s enough pain remembered for me today,