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How to Be a Great Commodities InvestorBy
Tuesday, November 1, 2011
"THIS is what a market bottom in copper feels like," I told Brett Eversole on October 20.
Brett has worked right next to me for over a year... And he's never heard me say that before.
The last time I said anything like that was in late 2008, and I made a triple-digit return...
The last time I bought a handful of commodities companies was in late 2008 – because that was the last time it felt like a bottom to me in commodities. I sold all those commodity companies in January 2010, for a double or more.
I haven't owned commodities companies since... until 11 days ago, when I bought a handful of small-cap commodities companies on October 21.
Could I make triple-digit profits this time? It sure is possible... The setup conditions are similar to what they were in late 2008.
"What makes you say this feels like a bottom in copper?" Brett asked me.
It felt like a bottom because "investor sentiment" about copper had reached its lowest level since late 2008... Also, large speculators in copper were "net short" – meaning they were betting against the price of copper – for the first time in years... And on October 20, the price of copper fell 6.6% in Shanghai, with no good explanation...
It felt like copper had hit the "puke point" that day.
Beyond all that, after nearly two decades in this business, it "felt" like a bottom. When the market bounced back the next day, I bought. Copper is up about 18% since then – and many commodity stocks are up much more.
How can you get to this point? How can you become a confident commodities investor?
First, a bit of reading will take you a long way... In the last three weeks, I've read a handful of great books, including a few great ones on commodities.
Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks by Adrian Day is an excellent book to get started investing in commodities. Adrian explains investing in everything from gold to copper to oil, in easy-to-read, plain English. I highly recommend this book.
Jim Rogers' older book, Hot Commodities, is also an easy-to-read book on commodity investing.
Another excellent (though much more dense) new book is The Quest: Energy, Security, and the Remaking of the World by Daniel Yergin. Yergin wrote the definitive book on the oil industry, The Prize. This new book doesn't give specific investment advice, but it does bring you up to speed.
Second, I personally like to follow what the best investors in natural resources are up to – guys like Rick Rule, Eric Sprott, and Jim Rogers. These guys know these markets well, they're very smart... And they're easy to learn from. I just look for interviews online from the masters. (You can find many of them on The Daily Crux.)
I'm no expert in commodities. I don't want to be. Instead, when I believe the time might be right, I seek out guys like these, who have consistently made big money in that field and figure out what they're doing now.
Lastly, in case I'm wrong, I always have an exit plan... And I always cut my losses early. To improve my odds, I prefer to wait until the sentiment gets terrible as it did a few weeks ago... and then wait for an uptrend. THEN I get in.
This time around, I am trading it the same way I suggested trading Germany... with 15% downside risk and 100%-plus upside potential. I like those risk-and-reward characteristics. If my investments fall below their recent lows, I got the trade wrong. I'll exit then.
In sum, before you invest in commodities...
Two weeks ago, it felt like a bottom in commodities, so I bought. So far, so good.
Want to try that yourself? You can. Just follow those three simple steps.
Good investing,
Steve
Further Reading:
"In investing, you make the biggest fortunes by buying and owning as things go from 'bad' to 'less bad,'" Steve writes. Right now, German stocks are cheap, hated, and just starting an uptrend. Get the details here: Upside: 100%. Downside: 15%. Buy German Stocks Now.
Last month, our sister site The Daily Crux spoke with resource expert Rick Rule. Learn which commodities Rick thinks are a great buy today, which ones he's still bearish on, and which commodity he says could be "the most undervalued commodity of all." The interview is free to Crux readers. Access it here.
Market NotesHERE'S WHERE TO SHORT CRUDE OIL Last week, your DailyWealth editors attended our annual lifetime-subscriber conference in Santa Barbara, California... where one of the most interesting "trading topics" was crude oil.
Several traders there expect weakening demand and ample supplies to send crude much lower in 2012. But the big question was, "How do I time it?" Our answer: "Watch for the downside breakout."
Regular DailyWealth readers are familiar with the concept of a "breakout." This is simply when the price of an asset "breaks" to a new price range, either up or down. No trend can begin without one... and they often serve as a "starter's pistol" to kick off big moves.
Below is a two-and-a-half-year chart of crude oil. As you can see, oil enjoyed a terrific rally from the high $70s per barrel to the low $90s during October... so the momentum is still to the upside. But should a looming recession dent global oil demand, oil will crater... and a downside breakout below $85 would be a good place to go short.
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