Please, Hand me a Bottle of Tylenol!

A reader recently sent an email, asking:

“What do you think of BRIZF, Brazil Resources? There are some interesting people putting money in this!”

What does he mean by “interesting people”?

Someone please hand me a bottle of Tylenol. My brain is already starting to hurt.

Maybe my brutal honesty will make this reader unhappy, angry, sad and emotionally unstable.

But we call this letter Covel Uncensored for a reason.

Let’s start by going down this “interesting” rabbit hole for a moment. I will play along with an example.

Here goes.

Kim Kardashian is interesting.

She is the daughter of one of OJ’s attorneys. Her dad helped to get a killer off in the most famous case of American courtroom abuse.

As a kid, she saw her dad becoming famous for that. I guess that motivated her.

That’s interesting.

As she got older she released a sex tape and somehow parlayed American’s love of voyeurism into a hit TV show. I suspect she is worth hundreds of millions.

That’s interesting.

Now that we agree she is interesting how is that useful for anything?

It’s not.

But maybe this reader means someone interesting in the investment world. So, I will play along.

Straight from the headlines: hedge fund manager Bill Ackman is interesting.

He’s one of most famous billionaires on Wall Street.

Last year, he bought a $91 million apartment, the second-highest price ever paid in Manhattan.

And his company Pershing Square Capital Management has crushed the returns of the stock market.

From 2004 to the end of 2014, Pershing Square generated a total return of 692% net of fees, beating the S&P 500’s 132% return.

We should just blindly follow Bill Ackman’s investments because he is interesting, right?

How to Lose 85% Following Interesting People

Back in 2015, Ackman’s fund took a massive position in Valeant Pharmaceuticals.

How did that turn out?

Take a look at the chart…

Valeant Shares have dropped

If you had followed his brilliance on Valeant you would have lost your shirt. But at least he is interesting!

My sarcasm aside, in October 2015 short-seller Citron came out with report accusing Valeant of fake sales and calling it the “Pharmaceutical Enron.”

At the time, the trend was already down, as you can see in the chart.

The news of potential accounting fraud just accelerated the downturn.

If Ackman had been simply following the trend, he would have gotten out a long, long time ago. Instead, he’s sitting on the biggest loss of his career.

My point is… blindly following interesting people is a mindless strategy… even if they have a legendary track record.

Which brings me to the main question…

Should You Buy Shares of Brazil Resources?

We have already established you can’t buy an asset just because interesting people are buying it.

Now, I understand that Brazil Resources is a small exploration company with substantial gold projects in Brazil and Alaska.

Projects that may or may not pan out.

Risky?

You bet.

How many times have you heard small exploration companies tell their investors, “Sorry, we didn’t find as much gold as projected, we’re going out of business.”

That happens all the time.

It happens so often that many of these plays are most likely organized scams from the outset, a way for operators to legally steal.

And what happens if the price of gold does not go up?

Unless you’re an expert in geology and mining, your odds of losing money in exploration companies are very high.

It’s the same as gambling… gambling while blindfolded and drunk perhaps.

Plus, the liquidity here is terrible. For that reason, my proprietary system will never recommend this stock.

The lack of liquidity can lead to some crazy price action.

On July 2, 2015, for example, the stock went from $0.481 to $0.045.

That’s a 91% drop in one day! Talk about having a heart attack. (Are we seriously talking about this insane stock?!).

Granted, the stock recovered most of the losses that day.

But what would you have done if you had checked the price that day?

I bet you would have made a panic sell at the very bottom.

Investing in a diversified portfolio of gold miners is a much better bet.

And I’m saying that because my proprietary system currently has a buy signal on gold stocks.

For example, it triggered a buy signal on GDXJ, an ETF that tracks the performance of junior gold miners. And it’s showing a stop loss at $16.03.

I don’t know of any interesting people investing in GDXJ. But that’s a much safer way to invest your hard earned capital than Brazil Resources.

Please send me your comments to coveluncensored@agorafinancial.com. I’d love to hear your thoughts. Please tell me exactly what you think. Don’t sugar coat it!

Regards,

Michael Covel
For, The Daily Reckoning