Lessons Learned From an FCX Bungle

The mistakes I made with Freeport McMoRan(FCX Quote) this year were classic and a great learning experience of what not to do in the market. But we can and should make lemonade out of this lemon. If we've learned the lessons from that example, we've now got a couple of nice stocks today to consider that show a similar pattern and could be poised to make up for my mistake.

The copper and gold stock yesterday closed at $58.12, up from its December lows of $16.80, a move of more than 340%. In this market, a three-bagger has been pretty rare - it's rarer still that I hold a sizable trade pretty close to the price of a low and fail to capitalize on its big move.

I bought Freeport in November in the low $20s on a slow and methodical scale over a few weeks. The method of scaling in allows you to spread out your price basis and be more likely to withstand the "random walking" that all stocks do. I made no mistakes in that process, buying shares in the high $20s all the way down to $19 and giving me a very tidy average in the low $20 range.

I had bought Freeport using two very strong arguments: first, Freeport was caught in the whirlwind deflation trade of gold and oil going through the second half of 2008. While oil was collapsing off of its highs in July 2008, all commodities and commodity-based stocks were getting pummeled as well, most of them unreasonably so. Freeport had managed to trade north of $120 earlier in 2008 before it started its decline into the $30 range in October, when it started to pique my interest.

The second reason was its "cash" position and I don't mean dollars. With the stock in the mid $20s, many of Freeport's analysts had determined that the cash holdings of copper and gold contained in storehouses and in its fully owned physical assets were now worth more than the full market cap of the company. This by itself wasn't entirely unusual -- we were encountering a lot of securities where the cash position was equal (or greater than!) the market cap, but this was very strange and rare for a commodity stock.