The Top Three Mistakes Investors Make

Photo: The Top Three Mistakes Investors Make

Making money in the resource sector isn't easy. Many investors see the fundamentals for a metal like gold or copper and want to buy into what they view as a great opportunity. The problem is, the mining sector trades a lot differently than the commodities it produces. This makes investing more difficult, especially for investors that want to leverage the underlying price movements in the metals.

The last decade has seen some big successes in the mining sector. It is easy to get caught up in the hype of a big discovery, and the ensuing rally in the shares of the company that found a new resource. The sad fact is that for every big discovery, there will be numerous junior miners that burn through investor's capital and don't end up creating anything of value.

This enlightening presentation from Jayant Bhandari from the last IMIC is a great source of insight for investors that want to buy into the mining sector, or into metals directly.

Before you start buying shares or looking for the next junior miner that is headed for the stars, read through these mistakes that investors make, and keep a firm grasp on your capital.

Mistake One: Getting Caught Up In The Hype

A big exploration success usually creates a lot of news and a massive ramp in share prices. Unfortunately, unless you got in early, by the time a share is going vertical is it too late to buy into the action. While the new resource may become a great mine one day, the time between an exploration success and a producing mine isn't smooth, or without risk.

New resources can also create a staking rush around the new discovery, which is even more dangerous for uninformed investors. In most cases, the junior companies that are staking claims around a new discovery don't have much chance of creating lasting value. While these hot-potatoes could make for a good trade, over the medium term, they are likely to burn anyone who holds them.

Mistake Two: Buying A Stock Instead of the Commodity

There is a common misconception that gold and silver have been poor investments over the last decade or two. Nothing could be further from the truth. The price precious metals have lagged tech stocks, but gold is up more than 20% over a 10 year period. Silver is more or less flat over the same time period, though one look at a silver chart will show you how volatile the last decade has been for the white metal.

The precious metal miners, on the other hand, have been a poor place to be for the last decade. Part of this has to do with the overall weakness in resource stocks, and changing market conditions are also a factor. Regardless, aside from a handful of precious metals miners, if an investor wants gold, they should buy the physical metal.

This is not to say there is anything wrong with buying mining stocks, it just means there is a lot more work to be done before deploying your capital.

Mistake Three: Not Doing Your Homework

People like Doug Casey, Rick Rule and Marin Katusa aren't magicians. They have been successful in resource investing because they dedicate a lot of time to digging deep into what a company has, and who is in charge. One of the biggest mistakes that small investors make in the resource sector is buying stock before they really understand a company, and who is running it.

Much like the tech sector, there are only so many people like Steve Jobs and Bill Gates. Doug Casey puts a very high value on who is in charge of a company, and if you want to buy into solid companies, getting to know who is running them is step number one. This all takes a lot of work, which is why many resource investors lose their capital, and never come back to the sector.

Learn From Some of the Best

If you want to learn more about where the market for precious metals might be headed, the upcoming Silver and Gold Summit in San Francisco is a great opportunity. Not only will the summit feature representatives from hundreds of mining companies, there will be some of the best analysts there sharing their thoughts.

Talking to the CEO of a mining company is a great way to get a feel for management, and learning about what they are up to face-to-face. The Silver and Gold Summit will be happening on October 28th and 29th, at the Hilton San Francisco Union Square Hotel, right in downtown San Francisco. If you buy your ticket before the event opens, you will save $20 USD off the normal admission price!