Sunday, April 09, 2006

Picking Stocks is Hard

Looks like Croesus Mining will survive though I have no idea what the shares will trade at on 28 April when the suspension ends. One reason I originally bought shares in this company was because I had read they were not doing much hedging of the gold price. And looking at the accounts over the years this seemed to be the case until suddenly their hedgebook exploded. Gold miners hedge by agreeing to sell their gold at a predetermined price using futures (or forward) contracts. This means that they miss out on any upside or downside in the gold price. It gives them more certainty. Any extra gold they produce could be sold at the spot price. A problem happens, I now understand when production falls short and the gold price is rising steeply. Then they need to buy gold at the spot price and sell it at their lower contract price. I knew also that Croesus was having some difficulties in operations, but it seemed like they were addressing these - for example selling a large part of their mineral concessions at a nominal profit. And the company kept putting out announcements on promising exploration results. Seemed that reserves while never big were being replenished. A warning sign I should have noted was when last year they appointed a new CEO who resigned within months. I thought I understood fairly well what was going on with this firm, but now I see I didn't. This is a reason that I don't try to pick many individual stocks in "industrial companies" for long term holdings (as opposed to closed end funds, and other financial operations). I have very few. It is hard for an individual investor to have any edge in this, unless they are knowledgable about a particular industry or there is a very clear undervaluation phenomenon.

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