2008 saw spectacular rises and falls in the price of mining investments. You could have made or lost a fortune selling or buying at the wrong time ion 2008. What lessons does this leave with us as we study the rules of investing in mining?
The rule of never trusting the experts is as good a rule as any to cull from the bubble bursting of 2008. Or maybe the rule is that there will always be bubbles in free markets, and thus as an investor you need to continuously be on the look out for over optimism and unrealistic pessimism.
As classic example of good and bad predicting is reported by Mineweb who run a competition each year to predict the high, low, average, and closing price of gold.
Here are the actual number and the predictions for 2008. LBMA is short for London Bullion Market Association, who should know.
|
Category |
Actual |
LBMA Panel |
Mineweb readers |
|
Gold price high |
1023.5 |
1009 (-24.5) |
1129 (+105.5) |
|
Gold Price Low |
692.5 |
743 (+50.5) |
795 (+102.5) |
|
Year end price |
865.0 |
Not submitted |
1046 (+181) |
|
2008 Average price |
872 |
862 (-10) |
935 (+63) |
In reality, the LBMA did not do too poorly and may well have been a reasonable basis for making decisions to invest in gold. But the readers of Mineweb would have lead you astray all too rapidly with their herd optimism.
There is a theory that the averaged predictions of a large number of ordinary people are more likely to be correct than the prediction of one expert. Thus one way to deal with the plethora of predictions is to average them all before acting. This is easier said than done, and demands more work and more hard-nosed scepticism than most investors have the time or skill to execute. But it is a valid route, regardless of how difficult it may be to put into practice.
Keep in mind too that in the theatre of prediction, with a sufficient number of participants and a wide enough spread of predictors, the shear statistics of the activity, will mean that some are correct. It is a mere matter of probability that some will get it correct in hindsight. Do not be tempted to take the winner, the correct predictor, from one year and use their predictions as the basis for mining investment decisions in the next year.
Thus to summarize: read what the experts have to say. Try to “average” their predictions, but use your own good sense and gut instinct and intellect to make the important decisions.
Thus a new Investment Rule: Never trust the experts. Only a few of them will be correct and you cannot determine in advance which ones will be correct.
