good piece by Steve Sjuggerud on the latest buying opportunity in the commodities sector
How to Be a Great Commodities Investor
By Dr. Steve SjuggerudTuesday, 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...
- Get the background... Read those books.
- When you're ready to buy, figure out what the best in the business are doing and mimic them.
- Have an exit strategy. Know when to cut your losses if you're wrong.
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
-- The MasterFeeds
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