What can a movie starring Matthew McConaughey teach investors? Plenty, it turns out — at least if you watch the right one.
McConaughey’s latest offering is “Gold,” and in it he plays Kenny Wells, the down-on-his-luck owner of Washoe Mining. Edgar Ramirez plays geologist Mike Acosta, and together they see enormous success after discovering a huge Indonesian gold deposit — that is, until it all turns out to be a fraud.
Sound familiar? That’s because the story was inspired by Canada’s 1997 Bre-X scandal. Wells is loosely based on Bre-X founder David Walsh, while Acosta is a combination of Dutch prospector John Felderhof and Indonesian geologist Michael de Guzman. And of course, their massive and ultimately fake gold find is Bre-X’s Indonesia-based Busang deposit.
Opinions are divided on how good the movie is (and on how well it presents the Bre-X story), but we think if you look closely enough it’s at least able to provide a few investing lessons. Watch the trailer for “Gold” below, then read on to see what we learned from the movie.
1. Take profits
When Washoe starts taking off, Wells’ business partners and mining industry contacts are eager to get in on the action. Wells is all for it, but offers some rare words of caution to one friend: don’t forget to take profits. In other words, take at least some money off the table if the stock really starts flying.
The advice is sound — in fact, Frank Curzio of Curzio Research gave investors the same tip at this year’s Vancouver Resource Investment Conference. Unfortunately (spoiler alert) Wells’ friend didn’t listen.
2. Pay attention to management
Washoe’s incredible results eventually draw interest from institutional investors, and about halfway through the movie one of them offers to partner with Wells and Acosta on the project. The exec who presents the deal to them insists that because their experience lies in prospecting and exploration, they’ll need help bringing the deposit into production.
Wells and Acosta soundly reject the proposal, claiming they can do it themselves. The scene comes off as a heartening show of independence, but from an investment perspective their decision is questionable. Experts often recommend investing in companies whose management has a proven track record, and while Wells and Acosta are plucky, there’s never any suggestion that either has ever brought a mine into production.
3. Beware of risky jurisdictions
Major miners aren’t the only ones who decide they want a piece of Washoe’s find — as the movie progresses, the Indonesian government decides it wants to get in on the action.
This potential roadblock ends up working out for Wells and Acosta, who are able to make a deal with the Indonesian government. Even so, the incident shows just how risky it can be to invest in companies with assets in less stable jurisdictions.
4. Diversify your portfolio
Riding a rising stock to the top without selling anything along the way is an easy way to lose money, but if you diversify your portfolio you’ll at least have other investments to fall back on if one fails.
Unfortunately, that’s another investing lesson Wells and many of his friends didn’t follow. Wells, who has next to no money at the beginning of the movie, appears to end it with even less — in one of the final scenes he tells the FBI agents interrogating him that he’ll have to sneak out of the hotel he’s staying at because he has no money to pay for his room. That, of course, is because he’s put it all into his company.
5. If it sounds too good to be true, it probably is
If there’s one investing lesson that “Gold” really drives home, it’s that if something sounds too good to be true, it probably is. As the truth behind Washoe’s discovery is revealed, the movie begins to center on the question of how so many people — many of them experts — could have been duped.
The answer turns out to be simple: no one looked hard enough at the information being presented. Investors, big banks and even those working at Washoe wanted so badly to believe what they were being told that they didn’t bother to do their due diligence.
Today that problem has been solved to some extent — after the Bre-X scandal the Canadian mining industry became much more regulated. But that doesn’t mean investors don’t need to do their research. As International Speculator editor Louis James recently said, “dig deeper, try harder [and] don’t be impatient.” He added, “there’s always a fatal flaw.”
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.