In 2013 I made my first investment in gold, purchasing shares in Saracen Mineral Holdings Limited (ASX: SAR). I'd done my research, the company was reasonably well funded, had good assets and delivered output at a decent cost.
The price of gold had just plunged to US$1,200 an ounce and the share prices of everyone from Newcrest Mining Limited (ASX: NCM) on down had been wiped out with the gold falls.
Yet Saracen was still profitable, I was expecting the Australian dollar (which bought more than 100 US cents at the time) to fall sharply, and Quantitative Easing (QE) and super-low interest rates were out in force and I expected those to stick around for some time.
I suspected gold might fall a little further, but thought 'fair value' (insofar as gold has a 'fair' value) for the precious metal was around US$1,100 – US$1,200 an ounce. Saracen had a gold hedging program in place for up to US$1,500 an ounce, which was the icing on the cake.
The cherry on top was the fact that – through sheer luck – I bought shares at the very bottom of the market for 14.5 cents apiece. If this is sounding like the perfect investment, it was. Saracen shares now trade for $1.09 each – more than a 700% increase.
Yet I made a profit of just 6% on my investment. How?
I sold my shares just over a month after I bought them. The price of gold had wobbled and, being new to the gold industry, I wasn't confident in my knowledge and instead believed investors and media reports predicting an impending collapse in the value of gold. My mistake was thinking that these investors and media gurus knew something I didn't.
This happens every single day on the ASX
Recently, shares in Bellamy's Australia Ltd (ASX: BAL) and Blackmores Limited (ASX: BKL) crashed 10% in a single day over new import taxes and regulations in China potentially affecting sale of their products. Some in the market opined that this was bad news for the businesses, although Bellamy's released a statement a day later saying that the fears were unfounded.
The trouble was that many investors overreacted, selling their shares after the initial media coverage and without considering the likely impact on the business.
When tins of Bellamy's formula are selling for four times their shelf value on the 'grey market' in China, is an 11% tax likely to have an impact on 'official' (off-the-shelf) sales of Bellamy's products?
Another key fear was apparently that Bellamy's products were no longer eligible to be sold in China. Given that it took nearly 10 years to achieve the China-Australia Free Trade Agreement (ChAFTA), how likely is it that China would suddenly ban all baby food and vitamin imports?
Stranger things have happened and China has a track record of industry protectionism, but on balance it appeared likely that the impact on affected businesses would be minimal. The trouble was that some shareholders believed that analysts and media pundits knew something they didn't, and abandoned ship. The market is reasonably well informed, and if you haven't done your research you are vulnerable to being caught out in this manner.
However, in this (and most) situations, everything investors needed to know was in the public domain. The Motley Fool's head of research, Joe Magyer, on the basis of publicly available information, told members as far back as 29 March 2016:
"Is the demand for Bellamy's infant formula in China likely to be impacted? We don't expect by much, and even less than the 7% hit the shares took today."
Don't make the same expensive mistakes that cost me and Blackmores/Bellamy's shareholders so much money. If you've done your research, it's pretty unlikely that the market knows something you don't.
