Vane Minerals (VML) - News and Discussion

The Folly Of Backing Yesterday's Winners

By Kevin Godbold | 18 December 2006
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When we see men of a contrary character, we should turn inwards and examine ourselves. --- Confucius (551 BC 479 BC)

I did an experiment in January 2004 and set up a watch list of the previous years highest growing shares by share price.

The results suggested to me that investing in last years winners might not be a good investing strategy, as only four of the ten shares mentioned have higher prices now than they did at the beginning of 2004.

Investing in last years winners can be like arriving at a party just after the taxis have been called -- you have missed all the fun!

So perhaps a contrarian strategy makes sense.

The road less travelled

Many people associate contrarian investing with value investing but I do not believe that that is the whole story.

Buying cheap shares based on value criteria can help to identify out of favour sectors and companies, but can become a bit mechanical. There is room in a contrarian investment strategy for your own judgement as well in my view.

For example, instead of chasing the price of Uranium up with an investment in Cameco (NYSE: CCJ) , I could consider an investment in Vane Minerals (LSE: VML) -- a self-financing Uranium exploration company.

Cameco may have been the obvious value selection when its share price was hit by the recent flooding of one of its Uranium mines, but therein lies the problem -- it was the obvious value selection and an investor might well have ended up following the herd. Being contrarian may mean looking for different angles on the same theme -- in this case, the rising price of Uranium.

Doing something different is not the same as doing the opposite

Vane Minerals is appealing to me because it's a speculative small cap. These kinds of companies appear to have had their share prices beaten down since the market correction in May. This is so much so in the case of Vane that its North American uranium prospects appear to be in the share price for free. So by buying Vane, I may yet benefit from the high cost of Uranium if the company can prove up its uranium reserves.

Alternatively, an investment in companies where the underlying resource may not be so popular now is another option. For example, Western Canadian Coal (LSE: WTN) , a coking coal company that hopes to supply the worlds steel producers, is appealing. As is Aminex (LSE: AEX) -- an oil exploration company. While attention is on Uranium, companies involved in other commodities may offer better value.

So doing things differently within the 'hot' resources sector offers an alternative to doing the opposite and avoiding it altogether.

Why doesn't everyone do it?

A contrarian point of view can feel very uncomfortable indeed if you end up being wrong and every body else is right. Perhaps that explains some of the herd like mentality that we see operating in the stock market. I also think that it is desirable to go with the crowd eventually. Once the crowd realises that you were right all along, it can be worth hanging on to the share for a while if you want to maximise your profits.

Buying out of favour shares can be very profitable indeed. Just ask some of those who were buying oil companies in the late nineties and who still hold them today.

Kevin owns shares in Vane Minerals, Western Canadian Coal and Aminex.