SAN FRANCISCO - Hard assets investors make "lots of" mistakes says geologist and Big Picture Speculator investment newsletter founder and editor Jim Letourneau, who offered some suggestions for avoiding three of them at the San Francisco Hard Assets Investment Conference 2010 on Sunday.
"There are more than three and I may not have the main three," Letourneau said, noting that such conferences are often designed to help companies make "lots of money" but sometimes not to avoid such mistakes.
The first mistake he cited was confusion about commodities. "When you buy a junior exploration company, you are not buying the commodity," Letourneau said. Instead, he noted, the investor is buying a share certificate and in contrast to a commodity, which retains value, a share certificate's value can potential be wiped out.
There's a "big difference between owning physical metals, and companies you can own shares with," Letourneau said, noting that such factors as management risk and country risk are factored into the exploration company. "You have to think about how many degrees of investment are you from that physical commodity," he said.
The challenge is to be "not too far down the food chain," Letourneau added. "You are taking on a lot more volatility and risk the farther you are away from production."
Pounds in the ground are also not worth anything until they are sold, he notes. The focus of the management of such early stage companies is also worth examining as to whether they are "collecting lotto tickets" or "chasing ambulances" for projects that have questionable prospects or advancing or condemning projects through their actions, he said.
Investors should look at the history of managers and what projects have they been involved with previously, Letourneau. Keep in mind that hundreds of companies are launched but very few make it into production, he noted. In fact, he added, "Most management groups fear taking a project into production" and are seeking ways out ahead of that.
Letourneau noted that author financial commentator and investor Jim Rogers has said, "Many studies have shown you are better off buying commodities themselves rather than commodity stocks unless you are a very good stock picker."
A second area of mistakes made in hard assets investing is not doing sufficient homework on management , broad market trends and the cash positions of companies. "Which day didn't you think it was a bad day to sell," is a question that is asked after investments fail but such impulse should also be acted upon, he said.
Some companies are headed by "fantastic idiots" who are in love with the geology of a property but unable to advance projects. When the cash position is declining and no money is coming in the management also has to become more promotional and dilution of ownership is likely, he noted.
Investors should be careful about the news sources they read on their investments, promotional efforts of investor relations firms and chat room talk while staying on top of disclaimers companies issue. "Have a good idea of what the news is going to be," Letourneau said.
He recommended that investors take advantages of online sources of information such as the System for Electronic Disclosure by Insiders (www.sedi.com), www.candianinser.com, the System for Electronic Document Analysis and Retrieval (www.sedar.com), www.corebox.com, www.nyse.com, www.nasdaq.com and www.sec.gov.
"When you lose money you should know why you lost it," Letourneau said, who said he is always trying to make his own investment education less expensive. "Know what you are getting into. Don't have sour grapes about losing money."
A third area of mistakes made by investors is what Letourneau described as "accepting tips and touts." One's own judgment is usually better than tips by others, Letourneau aid. Every investor makes mistakes, he added, but successful ones will realize their mistakes and take action, he added. "Don't be afraid to sell," he said, recommending that investors conduct their own "fire drill" from time to time to be ready "when the market really starts to crash."
Phil Burgert is managing editor of ResourceInvestor.com. He can be contacted at firstname.lastname@example.org.