PLEASE NOTE: I THINK THE LESSONS CONTAINED IN THIS BLOG ARE VERY PERTINENT TO BEGINNERS AND INEXPERIENCED INVESTORS - AVOIDING BAD INVESTMENTS IS A KEY PART OF CONSISTENTLY MAKING MONEY IN A SAFE MANNER.
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 !!
There is a key point here. We really cannot blame other people. We cannot say we lost money because the Company let us down. We cannot blame the Shorters, the Financial Press, the weather, Rob Terry’s rabbit - none of it matters - the Cock-up is due to us. We were the Muppets who bought the junk - accept that, learn the lessons and move on.
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:
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,
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