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Starting Now: 57% and 45% Annual Gains in Boring Investments

By Dr. Steve Sjuggerud
Monday, September 20, 2010

Coal and steel... What could be more boring?
 
What is there to get excited about? Where's the sizzle?
 
You'd be surprised...
 
Steel companies and coal companies are volatile... They boom and they bust, sometimes violently. Both steel stocks and coal stocks fell more than 80% from peak to trough in 2008. Then they both soared over 150% from the bottom in March 2009 to the end of 2009.
 
With "boom and bust" sectors, often a simple trend-following strategy can make you a heck of a lot of money... in this case, 57% and 45% compounded annually, as I'll show.
 
Two exchange-traded funds from Market Vectors allow you to trade steel stocks (SLX) and coal stocks (KOL). We tested both of these funds with a simple trend-following system – and came up with ridiculously good results.
 
Steel stocks rise at a compound annual rate of 45% a year in "buy" mode, and lose money at an annualized rate of 24% in "sell" mode. That's compared to 19% for buy-and-hold. (The data we used on the underlying index goes back to 2001.)
 
Coal stocks had an even better performance... but a shorter track record. Coal stocks rise at a compound annual rate of 57% in "buy" mode, and lose 43% a year in "sell" mode. Buy-and-hold gets you 16% gains a year. (The underlying coal stock index goes back to 2004.)
 
I can't divulge the particular trend-following strategy we used... But I will tell you it is extremely simple, and it's the same simple system for both coal and steel. With "boom and bust" sectors like these, the exact system isn't that important, believe it or not. And you don't want it to be complicated...
 
You see, the more complicated you make your system – the more you try to "curve fit" your data to improve your results – the less chance the system will work going forward.
 
I've recently hired an actuarial scientist and a Ph.D. in math. We are busy crunching numbers – studying all kinds of systems, ratios, and strategies that have worked historically.
 
While there's no guarantee that what worked yesterday will work tomorrow, we believe we are on to something great. These two showed me the simple steel and coal trends. You will certainly hear more about what they're up to in the next few months.
 
This particular type of trade is not well-suited for my typical True Wealth reader. But if you have a more speculative bent, you may want to consider taking a flier on the steel and coal funds today... If you happen to catch the start of the next big move, with history as our guide, you could make some fantastic gains.
 
Set a trailing stop to limit your downside risk, keep your upside potential unlimited, and let 'er rip!
 
Good trading,
 
Steve




Further Reading:

If you can stomach investing in one of the market's most speculative sectors, you may be ready for Matt Badiali's recent recommendation. One of these trades made 1,500% in just over 18 months. "The returns this sector is generating right now are extraordinary," Matt writes. And it's benefiting from one of the world's strongest uptrends. Read more here: How to Make 120% in One Month Trading Gold Stocks.
 
Earlier this year, Matt Badiali's readers more than tripled their money in a microcap gold miner. All it took was one simple strategy. The chart in this essay will show you exactly what to do: How to Lock in a 339% Profit in Less Than a Year.

Market Notes


NEW HIGHS OF NOTE LAST WEEK

Gold, Silver
Silver Wheaton (SLW)… silver royalties
Centerra Gold (CG.TO)… gold producer
Golden Star Resources (GSS)… gold producer
Ivanhoe Mines (IVN)… owns giant gold project in Mongolia
Pan American Silver (PAAS)… silver mining
Philip Morris (PM)… the smart way to play emerging markets
Cosan (CZZ)… Brazilian sugar and ethanol
Tata Motors (TTM)… India's largest automaker
Akamai Technologies (AKAM)… advanced Internet
Ventas (VTR)… big healthcare REIT
DuPont (DD)… chemicals
Heinz (HNZ)… food
Oracle (ORCL)… software giant
WABCO Holdings (WBC)… auto parts
York Water Company (YORW)… water utility
Sina (SINA)… giant Chinese Internet firm
Home Inns and Hotels (HMIN)… giant Chinese hotel firm
China Southern Airlines (ZNH)… giant Chinese airline firm
New Oriental Education (EDU)… giant Chinese education firm

NEW LOWS OF NOTE LAST WEEK

Arena Pharmaceuticals (ARNA)… obesity drug

In The Daily Crux

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