The commodity boom that took place at the turn of the century was spectacular by any measure. As prices soared for every raw material from coal and oil, to fertilizer and gold, the industries that produced them became the hottest areas of the global stock market. For shareholders of these resource companies, fortunes were made in short periods of time, and theories abounded as to why these stellar returns were merely a precursor of what was to come in a world where the forces of seemingly scarce supply and insatiable demand would work themselves out in favor of ever higher commodity prices.
The hitherto little discussed uranium supply became a focal point of one of the most fascinating but little discussed microbubbles in history. Propelled by the skyrocketing prices of fossil fuels like coal and oil, a looming shortage of which their ever-rising prices seemed to portend, nuclear power once more began to be discussed as the one source of energy that could satisfy humanity’s energy needs while having less of an impact on the environment. This renewed interest in nuclear power was reflected in the world price of uranium, which rose from less than $15 per pound in January of 2004 to over $136 per pound in June of 2007, an increase of over 900% in just 42 months:
This enormous gain in uranium was reflected in uranium stocks, which returned roughly 95% annually over the same period. To put this in perspective, one dollar invested in the World Uranium Total Return Index would have grown to more than $10.25 at the end of June, 2007. With such enormous gains in such a short period of time, uranium investors could not be blamed for thinking they had effectively won the lottery.
However, as are all earthly things, this newly-minted wealth was transient, and fortunes were quickly reversed. From the peak in June of 2007, uranium stocks plummeted more than 70%. In fact, $10,000 invested in uranium stocks at the peak would now be worth less than $2,500 now.
There is a personal aspect to this story. An acquaintance of mine, for whom I served as broker during the bull part of the cycle, made and lost a small fortune investing in uranium stocks. The exact numbers escape me, but I seem to recall that his uranium investments soared from around $70,000 initially to roughly $800,000 at the portfolio’s apex. This individual had effectively “won the lottery,” and all he had to do was quit while he was ahead. He did not, however, and both his material and psychological fortunes declined abreast.
While I was not in any position to advise this person during the steep reversal in uranium stocks, I have often reflected on his experience, and the cautionary tale it provides. One lesson, of course, is that most investors do not have a proper sense of risk and reward. Just as military professionals joke that they focus on logistics while amateurs focus on strategy and tactics, prudent investors put returns second, and focus instead on risks. All too seldom do we ask ourselves what could go wrong, and contemplate worst-case scenarios when framing our investment rationale. Through his quick and immense good fortune, this individual, like so many others, lost sight of risk, and ended up paying a hefty price for neglecting it.
Secondly, faith in compounding is not enough. Certainly, over a long enough time horizon, compounding is free to work its magic, but in the short-run, far too many things can go wrong to disrupt our investment process and nullify compounding’s hard work. The markets gods take away just as freely as they give, and we must be ever mindful of the transience of good fortune in the markets.
That being said, it must be admitted that luck is a big factor in investment success. But luck as an explanation can be overrated, too, as this experience taught me. To some extent, it was the man’s good luck to have had the resources available to invest when he did, but he also had to have the conviction to follow through and stay committed. It was also poor risk management, not just bad luck, when the tide went out and his portfolio plummeted. In sum, luck matters only in so much as one is equipped and willing to exploit it.
Finally, we must sometimes overcome the greedy part of our human nature, and be satisfied with what we have. It is true that opportunity cost is a very real and important consideration in any investment decision, and the “fear of missing out” can be a compelling force in us acting against our better judgment. Yet, in my experience, the humble investors, – those who acknowledge and appreciate risks as well as their ability to weather them, – are, in the long run, more successful than those who put themselves entirely at the mercy of the markets. Theirs is a more hard-won wealth that tends to last, while all too often the lottery-type wealth goes as quickly as it comes.
