When the country's richest investor acts, should you follow?
It's a fair question. After all a smart approach to investing is learning from the best and most successful. Names like Warren Buffett, Peter Lynch and Bill Ackman are frequently studied and emulated by savvy investors keen to learn their secrets.
But does Gina Rinehart's recent $4.2 million bet on gold exploration in Victoria mean gold is a smart bet for your money?
Well, not really. Rinehart's investment will be made through one of her subsidiary companies which will work in partnership with a listed exploration company Catalyst Metals Ltd(ASX: CYL) in exchange for equity in the exploration project. This means that rather than investing in gold miners like Newcrest Mining Limited (ASX: NCM) and Northern Star Resources Limited (ASX: NST), Rinehart is making a high risk (though potentially high reward) bet that Catalyst Metals Ltd can strike gold.
It's fair to argue, given prospecting for minerals in the past has made her so wealthy, that Rinehart has more experience and expertise than probably you or I to back her decision and lower the investment risk. But it could also come up unsuccessful.
Another important point is that although the investment itself seems big it represents just a tiny proportion of Rinehart's total wealth, estimated to be $20 billion in 2014 according to the BRW rich-list. If that number is still current, the $4.2 million represents a miniscule 0.021% of her wealth.
Listed gold producing miners like Newcrest Mining and Northern Star Resources with proven gold reserves offer less risk, but are still at the mercy of gold price volatility. The price of gold has sunk 11% since January as the U.S. economy and dollar strengthen, and while inflation remains elusive could fall further.
Rinehart's move doesn't tempt me to invest in gold miners, but if the allure of gold is simply too much for you, here are three tips:
- Favour low-cost ASX-listed gold miners over risky, capital intensive explorers,
- Minimise your risk by allocating only a small proportion of your total portfolio; and
- Don't investing any money you're not prepared to lose.
