Goldcorp purchase (G) – The problem with bottom fishing for stocks!

Mining companies have been hit really hard this year. If you look across the board, companies that have mining operations have had their stock prices decimated as a result of the commodities rout. With stock prices so low at the moment, it could seduce investors into buying shares of these companies at what they perceive to be a cheap price. It could lead to a situation of a value trap.

This is exactly what happened to me. I bought into Goldcorp (G), a gold mining company listed on the Toronto Stock Exchange (TSE) during the middle of this year. The logic was sound. I thought the gold price which had depreciated by over 40% over the past 3 years had stabilised and would in fact increase due to the Greek bail out problems which were to happen in a few weeks (as it turned out, there were problems as Greece didn’t accept the bailout conditions but the gold price didn’t budge – so much for gold being a hedge against crises!)

Furthermore, the stock price of Goldcorp (G) had reduced by a massive 60% in this period going from $54.91 to $20. The price was below what the stock sold for in the great recession of 2008/2009 which was $22.

I thought to myself, if gold prices have stabilised and Goldcorp is trading at a price below what it did during the depth of the great recession, surely the only way is up from here. I bought into Gold Corp at $20 and boy was I wrong!

After I bought the stock in the company, the stock price kept heading one way – down! The company even cut its dividend in August damaging the stock price even further. The company currently trades at $15.30.

Whilst this venture speculating on a stock rather than investing (what I should be doing!) has turned out to be somewhat costly, it has taught me a valuable lesson: don’t just buy a stock because the market prices has dropped. If you think it can’t go lower: it can!

Bottom Fishing for stocks can turn out to be a very bad move!

One of my investing heroes, Peter Lynch, stated that you should not buy a stock just because it has gone down in price. In that instance, Lynch had been, seduced by Standard Oil of Ohio (now part of BP) after it fell by 33%. He then watched it collapse further until it was down 67%. If you think it can’t go lower: It can.

In an interview Peter Lynch had with Louis Rukeyser, Lynch had the following to say about bottom-fishing for stocks

“There’s a common mistake, people buy stocks because they’ve fallen from price X to two thirds of X or half of X. On that basis alone, they’re buying the stock. That’s called bottom fishing the stock market. It’s very, very difficult. I had a rough go of it. Standard Oil of Ohio shares fell this year from 90 to 60 and I told everybody this stock is not going to go any lower. Then it went to 50. I said this it, no lower. As it went through 40, I said to people, this is it. Finally when it got down under 30, and people said what do you think of Standard Oil of Ohio? I said: “What does Standard Oil of Ohio do? I don’t know that company.” I absolutely backed away from it.”

Bottom Fishing for stocks is a type of market timing which in itself is a very very difficult skill. As Terry Smith says, there are two types of investors, ones that know they can’t time the market and one s that on’t know that they can’t time the market.

Right now there are many mining companies that appear to be like Goldcorp. Don’t make the mistake I made and simply bottom fish for stocks. Instead do your own research and only purchase a stock if the fundamentals of teh company make sense to you.

It is also important to remember that just because a stock price goes down, doesn’t mean that you have made the wrong decision. If you have done your research on a company and buy in at a price below the intrinsic value and the price goes down due to no explainable reason, you should hold your stock in that instance or even buy more, like what I have done with Zambeef. The difference with doing your research and knowing the value of a company and bottom fishing is that the latter is pure speculation whilst the former is investing based on research.

As Peter Lynch said “ when stocks are attractive, you buy them. Sure they can go lower. I’ve bought stocks at $12 that went to $2, but then they later went to $30. You just don’t know when you can find the bottom.”

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