An important lesson from today’s Fortescue (ASX:FMG) share price

The Fortescue (ASX: FMG) share price has had a shocker today, falling more than 4%. Here’s why you should pay attention.

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Investment Lesson

Fortescue Metals Group Limited (ASX: FMG) shares did not have a pleasant day today. At the close of trading, the Fortescue share price has fallen 4.25% to $19.16 a share.

It was worse earlier in the day though. At around midday, Fortescue shares were down more than 5.5% when a low of $18.87 a share was hit.

Today’s move represents the latest chapter in what has been a rapid wind change for Fortescue. It was less than a month ago that this company was commanding a share price of $25.24 a share, meaning Fortescue has dropped 24% since 25 February.

As my Fool colleague reported this morning, it is concern over a falling iron ore price that seems to be weighing Fortescue down.

But let’s look at the bigger picture for a moment. The miner’s performance over the past few years has in some ways masked the dangers that are inherent with investing in a company like Fortescue.

Yes, the company is up an extraordinary 347% since the start of 2019. But investors would probably do well to remember that Fortescue shares also lost roughly 30% of their value over the preceding 9 or so years.

Iron is a fickle master, even for Fortescue

Headed by one of Australia’s most successful business operators in Andrew Forrest, Fortescue is evidently an extremely well-run company. However, it is also bound to the fact that is a resource extractor at the end of the day.

Fortescue’s fortunes are forever entwined with the price of iron ore. It’s this fact that can make it a potentially dangerous company to invest in if you are unaware of these pitfalls.

Companies outside the resource sector are in far more control of their own destiny. Most companies can decide what prices to charge for their products or can differentiate what they sell in other ways. This is not the case with a miner like Fortescue.

Fortescue share price ups and downs

It can only sell its product, which is essentially the same as what every other iron or miner on the planet produces, for the prevailing market price. This is great in times when iron ore is rising. But it can be terrible (and capital destructive) if iron falls into a bear market.

For anyone who bought Fortescue shares at their mid-2008 peak had to wait until January last year for their investment to return to the share price they bought at. That’s not a desirable scenario to find oneself in. But that’s often the risk that is there when investing in a miner.

So make sure you keep all of that in mind if you’re thinking about investing in iron ore mining shares. Not knowing the ins and outs of a miner, in particular, can be very dangerous indeed.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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