[Editor's Note: It has been a tough May for commodities. But as this story explains, it's times like these when you need to consider going long. Whether it's stocks, commodities or any other investment, though, the rules in this story are timeless.]
Last month, our in-house metals-and-commodities expert Peter Krauth hosted one of his regular conference calls for his Real Asset Returns advisory service subscribers.
Peter's guest was Rick Rule, founder of Sprott Asset Management's Global Companies unit—a real heavy-hitter and one of the sharpest resource investors you'll find.
Rule is always engaging and provocative, and his presentation to Real Asset subscribers was no exception.
He capped off predictions for gold, energy and other commodities with four rules successful resource investors must follow.
And they're so good I had to share them with you.
Rule No. 1: Use Common Sense: "If it something sounds too good to be true, it is too good to be true," Rule told the conference call audience.
The Takeaway: Like all of Rick Rule's Rules, this one applies to all investments, not just commodities. For maximum gains and minimum heartache, be realistic about your expectations, thoroughly understand what you're getting into, manage your risk and don't succumb to hype.
Rule No. 2: Be a Contrarian: "The natural-resources markets are cyclical and capital intensive. What that means simply is that you have to be a contrarian. You are either going to be a contrarian or a victim. A set of circumstance where a market is down by 50% is not bad; it's good if you're a buyer. You need to remember [this rule]. . .when the market is very ebullient, that you need to be a seller. And when you're afraid and the market is terrible, you need to be a buyer."
The Takeaway: I love this piece of advice, which is valid no matter what kind of investment you're considering. As we've counseled repeatedly, being a contrarian doesn't mean that you're always against the crowd. In fact, once you've bought in you want the masses to buy in; that'll provide the liquidity needed to drive your holdings higher. It's at the "inflection points" where you want to be contrary: You'll buy when a stock or asset class is hated; and you'll look to sell when it becomes euphorically popular.
Rule No. 3: Do the Work: With investing, Rule says "you get out of it what you put into it. . .the more time, the harder you work, the more newsletters you subscribe to, the more people you question. . .the more money you're going to make. It's as simple as that."
The Takeaway: Someday I'll share some of the horror stories I've heard from investors who didn't take control of their own destinies, and didn't take the time to thoroughly understand what they were buying and selling. They were content to blindly follow the advice of advisors who too often had their own agenda. The carnage was something you'd expect to see in a Michael Myers/Freddy Krueger flick. Let me repeat Rule's advice: Do the work.
Rule No. 4: Understand the Risk/Reward Equation: "If you are willing to do the work, if you are willing to take the risk, you will make more money in the smaller, more speculative part of the sector. If you are not willing to work particularly hard, you need to [confine] your investments to the largest and best companies in the resource sector."
The Takeaway: It's like panning for gold. If you play it safe, stick with the crowd and pan inside known strikes, your upside will be very limited. But if you do all the research beforehand (in our example that would be water currents, geology, prior gold strikes, etc.), you're much more likely to find a mother-lode-magnitude strike. And it'll be yours alone.
All good stuff.
The fact that he can bring in conference call guests of Rick Rule's stature says a lot about Peter Krauth's connections, and the respect that he commands from institutional players.
As for the advice, it's worth following if you want to be a winner.
William Patalon III