February 23, 2007 – I remember nine months ago when gold was trading about $570 an ounce how many people that I told to buy gold stocks did not buy because some of the big names like Stephen Roach, the Chief Economist of Morgan Stanley, were receiving lots of media attention for their comments about the commodity bull run being over. Unfortunately, today’s average investor is somewhat like a robot.They ignore the #1 rule of highly effective investors: Learn how to do it yourself — and instead hand their money over to a financial consultant at a large global firm that barely knows any more than they do about investing (as most financial consultants are cleverly disguised salesman that know how to conceal their deficiencies regarding investing with clever firm-taught speeches about risk, asset allocation, diversification and so on). And number two- they make the huge mistake of further seeking the talking heads on financial TV and newspapers for advice rather than performing any critical analysis of their own.
There are two types of ignored asset classes. (1) The ignored asset class that truly is below the radar of 99% of investors; and (2) The asset class that is spoken about in financial circles often enough but that is still ignored by the overwhelming majority of investors. Both of these types of asset classes are where wealth is built in investing. Gold falls into the second type of ignored asset class. It gets enough attention but it still has been ignored by the most part, by large institutional investors i.e. mutual fund managers, specifically in the United States. If you want to know how I can draw this conclusion, just read this article here. Now that gold has moved up more than $100 an ounce since I’ve been regularly discussing it in my blogs for a year now as having a low risk- high reward setup, there are more individual investors slowly creeping on the bandwagon. However, I can assure you that as soon as there is a correction in this rally (and there will be one), all the pundits like Stephen Roach, will again hog all the media attention, state that the gold run has turned bearish, and many investors will flee this asset and cash out as quickly as possible.
Again, they will make the second huge mistake that highly effective investors never make — listening to the babble of financial media experts and blindly accepting what they hear as truth rather than performing any critical analysis of their own from the wealth of available information and drawing their own conclusions. The third mistake many investors will make is to just purchase the big names instead of the unknown names within an ignored asset class. The huge names that will appeal to the average investor as well as the institutional fund manager will be names like Barrick Gold and Newmont Mining. However, as I discussed in a previous Zen of Investing blog, Newmont Mining (thought it received a nice bump yesterday in share price), in this year, had appreciated as of last week only about 3.5% while the price of gold had risen over 10%.
This obviously has lagged many of the juniors that have appreciated 20% to 50% in the last several weeks alone. That is why you have to learn to invest yourself. Certainly you can’t depend on your financial consultant that may not even own a single gold stock in your portfolio to purchase the stocks that will rise 200%, 300% or 500%.
Lastly, before I end this week’s article, let’s briefly touch upon the ignored asset classes that aren’t even discussed with any frequency in the major financial media. Though I’ve purchased for my clients many gold stocks that have appreciated 30% to 60% in just 6 to 9 months time, there are a number of other asset classes that barely receive a whisper in the financial media that are even outperforming gold. In fact five stocks I currently hold in the category of ignored asset class type (1) are now respectively sitting on gains of 89.41%, 93.30%, 124.72%, 187.15%, and 145.77%, all in about 6-9 months time. Again, I wish I could reveal what asset classes these are, but out of respect to our members at maalamalama, I can not in order not to dilute the value of their memberships.
Even if I did, however, it doesn’t mean that most investors would be able to make these gains. This statement is very different than the statement that most investors are capable of making these gains. Most just won’t because they never learn how to invest themselves.
Just as the thousands of investors that eventually climb on board the gold bandwagon will make decent gains but not the types of spectacular gains deserved of this asset class because they hand their money over to investment firms that will buy the Newmonts and the Barricks of the world, in other ignored asset classes that are currently exploding or poised to explode, this scenario will play over and over again like a broken record. Investors will refuse to learn how to do it themselves, they’ll inform their consultants that they want to be invested in asset class A or B, and because their financial consultant will have no clue of how to identify the best unknown and little discussed stocks in these little discussed asset classes, they’ll go out and buy the industry leaders for these clients and leave hundreds of percents of gains on the table.
J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.