This…
Gold Dust
Is in here…
Cinder Cone
All this excitement surrounding GameStop of late has made me a bit nostalgic. It brings back memories, although not necessarily good ones.
Still, time passes, wounds heal and we can look back on our foibles with perspective if not humor.
Nothing is more intoxicating than picking a stock and watching it dramatically rise. Well, maybe one thing.
That rising stock is not only making you ever richer it is, uptick by uptick, confirming what a bright, savvy, insightful, dashing and attractive person you are. A true Master of the Universe who, in the case of GameStop and some recent others, can bring even mighty hedge funds to their knees.
I get it. I’ve been there, if in a less dramatic fashion.
One of my little secrets, which I have now mentioned on several podcasts but not, I think, yet here on the blog, is that I actually achieved financial independence picking individual stocks and, by extension, actively managed funds run by folks picking individual stocks.
This is what made embracing index investing, at least for me, so difficult. Picking stocks and funds, done well, works. It just doesn’t work as well or as easily or as simply over time as, say, VTSAX.
But back in 1989 I had yet to come to accept that. Indeed back then I was making all the same arguments for stock picking and against indexing I now hear directed at me. What goes around…
In any event, back in ’89, I happened to be on an airplane off on some business trip. I don’t usually talk to people on planes. Too much risk of being trapped hearing about someone’s recent medical problems or great insurance opportunity.
But this day, Ron R. and I struck up a conversation. He worked for a boutique investment research firm. By the time the plane landed he was telling me I should come work for them, and I had pried three stock ideas from him.
Once home, I looked over the three stocks he’d suggested and, somewhat randomly, choose one: Lamson & Sessions. I can’t find it listed now so either I am misspelling it or they got bought out somewhere along the line.
Over the next couple of months I watched two things unfold. My talks with them led to a job offer and the stock price for L&S tripled. That may not sounds like much given today’s action in GameStop, but this wasn’t a “pump & dump” play backed by internet chatter. For a stock picker like me, it felt like I had not only found the people who had the secret sauce, I was being invited into the inner sanctum where it was made.
Secret Sauce
Courtesy of The Mad Fientist
Fast forward a year and I had learned there is no secret sauce and even the best analysts in the business, people who live and breathe just a few stocks in one or two industries, struggle to predict successfully which stocks will outperform.
But before that, there was…
Mariah International
The Set-Up
Jimmy C. was one of the firm’s senior investment officers. A savvy guy, one of the perks of his success was he covered Arizona, not a bad place to escape to on business during the winter.
On one of those trips, he got to know the guys behind a small gold mining company who were developing a revolutionary new technology.
Over about three years, he probed ever more deeply into their business and operations. At one point he brought down several of our best analysts to comb thorough it. Given how small and focused the company was and how thorough this due diligence, it is safe to say few companies have been more deeply examined and understood by outsiders.
So impressed were each of these team members, when they were done, each began accumulating the stock. And they shared the story with the rest of us.
The Hook
Up around Flagstaff, where Mariah was located, there are these natural formations called cinder cones. People have long known there was gold and other precious metals in this material, but in very small particles and amounts. By most estimates at the time, a ton of cinder cone held between 1/2 and 2 ounces of gold. The problem was, no one knew how to economically extract it.
And that was the problem Mariah had solved.
In addition to having developed this extraction process, Mariah had leases giving them access to tons and tons of cinder cone.
While I don’t remember the exact number of tons, or the number of outstanding shares, it was a simple bit of basic math to calculate how much gold there was for each share.
Again, not remembering exactly, this being 30+ years ago, gold was then trading for ~$400 an ounce. With two ounces in a cinder cone this meant each cone had ~$800 of gold. And this meant each share of Mariah, as I recall, represented ~$1200 in gold after accounting for production costs.
Of course, two ounces was at the high end of the predicted yield. To be conservative, we used the lower 1/2 ounce number. That suggested ~$300 per share of gold. At the time, the shares were trading for 50 cents. This was on no one’s radar and there was no demand. You can see the appeal.
Soon we were all buying and that, just like you’ve seen in GameStop, was enough to begin pushing the stock up. As it rose, other investors noticed and began to buy.
At one point, in our firm’s morning meeting, the senior partner opened by asking, “Anyone care to guess what the most widely held stock in this firm is?”
Since the SEC requires folks in that business to disclose all their holdings and trades, he already knew the answer: Mariah International.
With the growing interest in the stock, soon it was trading at $10-12 a share. We were all already sitting on multiple percentage gains on our earlier purchases.
Of course, when you are figuring this stock should be trading at $300 a share based on the low estimate of the amount of gold backing it, you are not a seller.
At two ounces a ton you could be looking at $1200 a share, and that is before factoring in the push from the market excitement as the story breaks.
Hell, even if we have massively miscalculated the gold content and it is only half our lowest estimate, that is still $150 a share.
Thinking like this, it is not long before you have sugar plums dancing in your head.
So let’s take a moment to review:
- You have a company that has just developed an exciting and now proven technology.
- It has leases on the raw materials it needs (the cinder cones).
- It has been followed for years leading up to this point by an experienced investment pro.
- It has then been vetted by several more highly regarded analysts.
- It has become the most widely held stock in an investment firm filled with smart people who live and breathe stock picking and analysis.
What could possibly go wrong?
It certainly looked good to me, and remember I am no babe in the woods at this point. I had been investing in individual stocks for 15 years successfully enough to have achieved financial independence.
So, I too began to accumulate Mariah shares. By the time I was done I had $50,000 invested (my target amount) at an average of ~$3.33 per share, ~15,000 shares. This, for what it is worth, gave me the smallest, most conservative holding amongst my colleagues.
To amuse myself while I waited, I’d mentally calculate what those share could, would be worth:
At the low end 1/2 ounce extraction per ton, $300 worth of gold per 15,000 shares = $4,500,000.
At 2 ounces? A cool $18,000,000.
If our most conservative estimate was 2-times too high? That’s still $2,250,000. Not bad for a 50k investment.
But $50,000 is a lot of money to risk, especially for me in those days. In 2021 dollars it is ~$104,000 and back then a much bigger part of my net worth.
The Shut-Out
Of course, as you have likely guessed, it didn’t go to $300 a share, much less $1200. Not even $150, which we would have seen as a major disappointment.
It went to pennies. Four or five years later when I finally unloaded it, I don’t think those 15,000 shares cleared $1000.
When I want to depress myself, I go here and pick out the S&P 500 Return Calculator. It tells me in the 31 years since January 1990 the S&P 500 has averaged a 10.298 percent annual return.
Then I go to the Investment Calculator and plug in my 50-grand, the 10.298 percent return and the 31 years that have passed.
Invested in a simple S&P 500 index fund, my lost money would now be worth $1,043,679. Sob!
The Sting
So, what went wrong?
Well, the simple and official explanation was that the technology simply didn’t scale up in the field. But there were also lawsuits and accusations of securities fraud.
In the end, there was simply not an underlying business to support the stock price. Let alone drive it higher. Buyers turned to sellers and the price collapsed.
I’ll let you draw what lessons you may from all this. As for me, a few are…
- There is no secret sauce.
- No matter how thorough the due diligence and no matter how smart and experience those doing it are, you can never truly know a company or its future. The investing floor is littered with cases like Mariah.
- Ultimately there has to be an underlying business sufficient to support the stock price.
- We could have been right. It could have worked. And if it had, I very likely would have myopically seen it as the result of my astute investing prowess and totally missed how much a role luck would have played.
That last, of course, would have lured me into being even more confident and aggressive on the next one. And that hubris mostly leads to tears.
So I got something for my $50,000. A hard lesson in how things really work and one that brought me a step closer to embracing index investing. Because as I’ve said in many interviews now, while it hurt, Mariah was not my biggest investing mistake.
My biggest investing mistake, far and away, was that it took me far too long to have the humility and wisdom to see the value of indexing.
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Addendum:
In researching this I came across this article: From Cinders to Gold
It even includes a bit about Mariah. Seems the dream of extracting gold from cinder cones is still alive. At least as of 2005.
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NewRetirement:
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If you are interested in some of my other interviews, you can find many of them here: As seen on…
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Ad space available
After a long multi-year run, our friends at T&N have decided they need to give up their space in the Leaderboard. That’s the banner ad at the top of every page on the blog. We will remain in partnership with T&N, but it will return to the affiliate relationship we started with long ago.
So, we are looking for a new advertiser or maybe a couple. While T&N held the Leaderboard position exclusively, and we’d be open to doing that with another company, we could also offer it for half, third or quarter of the time. If you are interested, let us know in the comments and we’ll reach out with rates and availability. Thanks!
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Books
Here are a few I’ve been reading of late…
So, of course, I had to pick it up to see what provoked such a strong reaction. I figured I’d read a few pages and be done with it. I’m not much into vampires anyway. Turns out I found it fairly entertaining. The men are “condescending pricks” and there is an especially disturbing scene of an old lady eating a bloody, raw raccoon in a dark passageway. It is the second best vampire book I have ever read.
I’ve read two.
Flashlight
I don’t think I have ever posted about a product on the blog, and most I buy seem to disappoint. But I have been very impressed with this flashlight. It is solid metal and that alone is refreshing in this age of plastics. Very bright, adjustable beam. At ~$18 it’s a very good value I think. It does take six AA batteries so you want to be sure to have those. We happened to have them around, but it would have been disappointing to have to wait until we got out to pick some up.
Great for when you are out late at night hunting vampires.
