My worst investment ever

My story of investment woe dates back to late 2013 / early 2014. The gold price was just under the $1500 per oz mark, similar to where it is now as I write this answer. Gold had dropped from $1900 per oz three years earlier, and for very good reasons. Strong dis-inflationary tendencies, rising real interest rates and the increasing opportunity cost of being invested in a shiny pet rock as the stock market soared conspired to pull the rug out from beneath the gold market.

In the depths of the market I spied an opportunity. Sentiment towards gold and gold miners in particular was very poor. Fears over the long term impact of low interest rates and quantitative easing were beginning to surface. There was also some evidence that this was just a mid-cycle correction in gold prices similar to the mid-1970’s.

I decided that the gold market was pretty close to the bottom, and that there were compelling reasons why the gold price could have quite a bit of upside potential. I was excited to be taking a contrarian position in the market.

But here’s where things started to go wrong. I wanted a way to gain leveraged exposure to gold but also provide some limited downside in the case that gold fell further. I had read about a particular company in the press and on social media. It appeared to have one of the lowest cost structures of all the major gold mines. The low cost base would offer some protection in case the price of gold fell further.

Problem was that the country in which it was situated was looking to take back control over its resource sector. It was a monster mistake. The miner fell 30–40% before I could even bring myself to close out my position, and even then liquidity was so poor it took me days to finally exit.

I was tempted to hold onto it in the hope that gold prices would rebound, and I would be able to recuperate my investment. If I had waited for gold prices to rebound it would have been even worse. The share price remains 70% below levels at the start of 2014, despite a rebound in the gold price to similar levels.

The lessons I learnt from this particular painful episode include:

  1. Social media bombards you. Lots you can learn, but you must try and avoid being pushed into action by the noise.
  2. Importance of being clear about your own time frame
  3. Risk management approach is key – before you enter an investment or trade.
  4. Proxies for gaining exposure. Be careful about being too clever.
  5. Sentiment, and price can always get worse before it gets better.
  6. Not cutting my losses meant I wasted time, emotional energy and money. So there was an opportunity cost which meant I couldn’t look at other opportunities.
  7. I knew I made a mistake, but I didn’t admit it to myself.

If you would like to hear more, I was recently interviewed by Andrew Stotz, host of My Worst Investment Ever podcast. I have to say it felt good, if difficult to talk about. None of us likes admitting that we’re fallible. But by sharing our mistakes we can learn from each other, and hopefully avoid making the same mistakes.

Ep179: Peter Sainsbury – Use a Journal to Stay Self-aware When Making a Contrarian Investment – My Worst Investment Ever

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