By James West
MidasLetter.com
January 26, 2011
There’s a book making its way around the internet right now called “The Investment Answer” written by former institutional bond salesman Gordon Murray, who passed away on January 15th, and his friend and fee-based investment advisor Daniel C. Goldie. The book, which is being hailed as an epiphany for individual investors, was, in my opinion, quite frankly full of the kind of advice that will guarantee mediocre investment returns for investors who take it.
Recommending diversification across a multitude of funds and jurisdictions, it is a blueprint for a strategy that may or may not perform along the lines of the S&P 500, which, the author stipulates, is nearly impossible to beat.
Unfortunately for the author, and those who take this advice, they clearly lack any experience in resource investing – especially in the companies that explore for gold, silver, copper, uranium, oil and gas. As Midas Letter subscribers know, with a focused strategy and some good advice, returns of 100% within 12 to 18 months are common.
And just like investing in blue chips, bonds, and other “AAA” investments, you can easily some or all of your investment in the risky world of investing.
Yesterday I had the opportunity to defend the case for a continuation of the secular bull market that has been underway since 2000 on CNBC’s Fast Money. I called in from Lima, Peru, and fielded questions from the desk in a segment they call “Street Fight”, which I think is appropriately funny. The four resident investment pros who anchor the panel essentially try to get an admission from the guest (me) that the gold market was done for now, and the U.S. economic growth story justified equity investment.
Of course, I simply could not agree with anything suggesting that the bull market was not intact, and stated unequivocally that gold was still on its incremental march towards $2,000 and beyond, despite the present corrective weakness in the price. As I said on the show, there have been over 40 instances of gold correcting as to 10% or more to the downside in 30 to 60 day windows since the bull market in gold started in 2011.
And so with no further fanfare, lets outline a strategy for resource investors who want to see big wins in their portfolio, and the key steps that are necessary to win in resource investing.
1. Set goals, make a strategy, stick to the strategy.
The number one mistake individual investors make is investing with no clear parameters set in terms of selecting, managing and selling individual stocks within their portfolios. The biggest element to successful portfolio investing is discipline. Without a disciplined approach to buying and selling stocks, consistent returns are derailed by emotional reactions that see investors hanging on to their losers and dumping their winners prematurely.
We have a simple rule in the resource investing business that everyone needs to follow, and most of us (including me) take years to learn, and usually only do so the hard way: i.e. losing money. And that rule is: always be selling.
By that, your portfolio needs to have a measured pace whereby it is always yielding profits incrementally. You never have all your eggs tied up in one basket, waiting for some target performance number to arrive that never does. In resource investing, smaller incremental investments are made on a continuous basis that sets up a pipeline of future free cashflow which can then either be re-invested or used for asset accumulation.
2. Choose a sector, learn it, know it, stick to it.
Warren Buffett has a simple investment mantra: if he doesn’t understand it, he doesn’t buy it.
A simpler and better approach to investing there has never been. As a natural resource investor, I focus on the commodities that are the building blocks of everything else in industry. As opposed to chasing information in technology, financials, health care, manufacturing, transportation, insurance, or any of the other myriad asset sectors, Midas Letter focuses on commodities: gold, silver, platinum, palladium – the monetary metals group; copper, nickel, iron, zinc, lead, bauxite (uranium) – the industrial metals group; uranium, lithium, rare earths, oil sands, thorium – the energy metals group; and oil, gas and coal – the traditional hydrocarbons group.
By focusing on this relatively small materials group, and the companies that explore for, develop and produce these substances, we restrict our expertise to an asset group whose sub-components share certain characteristics. Thus we better facilitate our ability to understand and predict performance, as well as recognize patterns within the trading behaviours that instigate buy and sell signals.
3. Ignore the Bobbing Cork – Watch the Rising Tide
Among the most common and repeated mistake investors make is abandoning ship at the first sign of trouble. For instance, during the financial meltdown of 2008, when everybody was liquidating all investments and essentially battening down the hatches for a prolonged storm, astute investors were quietly picking up bargains while letting the sound investments in moentary metals whether the downturn.
Today, they are some of the only investors who can boast of 100% plus returns in 2008 and 2009. The Midas Letter resource investment portfolio returned an average of 237% on its 2009 investments, and that’s the kind of performance that is the reward of those who swallow hard whent the market plunges your investments into negative territory, albeit temporarily, knowing that just as downturns in any given asset group are necessary and healthy, the performance will eventually turn northward again in sound investments.
In the gold market, the see-saw pattern of gold’s relentless forward march to $2,000 and beyond means there have been several occasions where gold has lost more than $100 over a few weeks, only to see it come roaring back to set a new record within months of losing 10 to even 20% of its price. It is in these gut-wrenching dips that emotionally directed investors throw up their hands and declare an end to their participation in the gold market. They are inevitably shocked to learn that new records have subsequently been set, and doubly frustrated by the missed opportunity their behaviour caused. And that’s what we mean by “Ignort the bobbing cork – watch the rising tide.
You need to maintain a macro view in the sense of time, and ignore the noise of the likes of CNBC, and CNN and the Wall Street Journal, whose editorial focus is only daily, and whose objectives are not your investment returns, but readers, who are attracted first and foremost by hysteria.
Midas Letter author James West is writing a book called “The Real Economist” that will demonstrate these and other sound investment theories that have demonstrated in no uncertain terms the one aspect that we do agree with in The Investment Answer: the self-directed , empowered with knowledge individual investor will always outperform a Wall Street Investment advisor in his own portfolio. But you can also trounce the S&P 500 resoundingly.
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