The Real Wealth Strategist Trading Manual

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1 How to Profit From the Volatile Mining, Energy and Agricultural Markets: The Real Wealth Strategist Trading Manual

2 MATT BADIALI S Real Wealth Strategist How to Profit From the Volatile Mining, Energy and Agricultural Markets: The Real Wealth Strategist Trading Manual W HAT you hold in your hands right now is the secret to creating wealth in one of the most volatile sectors of the stock market. I m not referring to the stoic S&P 500 or the venerable Dow Jones Industrial Average. It s something much better and more profitable. You are about to embark on a journey through the whipsaw world of natural resource investing a place where perceptive speculators can make 100% gains and more in months. It s also a place where the unwary can lose $0.90 on every dollar. This rule book for investing in those markets is designed to help you become one of those perceptive investors the ones whose friends and family clamor around them asking: How d you do it? Think of yourself as a climber on Mount Everest. I m your Sherpa, and this manual is your oxygen. As long as you follow some simple rules, you stand to add thousands, hundreds of thousands, even millions of dollars to your account. Nearly all the success and failure in natural resource investing comes down to one thing: understanding the boom-and-bust nature of this sector. If you can ride the booms and dodge the busts, you will make money a lot of it. Real Wealth Strategist will provide you with well-researched investment ideas across the entire spectrum of natural resources helping you do just that. When we identify a trend, we ll focus on buying shares of highquality companies in that sector. Our ideas undergo the same kind of rigorous research and detail that hedge funds use. Our goal is to provide you with the highest-quality investment ideas so that you can grow your wealth. We want to stand with you as your wealth grows. However, this service isn t meant to replace a financial adviser. These ideas are speculative in nature, so I highly recommend you discuss allocation of your finances with a licensed investment adviser before you make any trades. Natural resource investments should supplement your main portfolio not replace it. Please do not assign more than 10% of your portfolio to these ideas without first getting professional advice from a licensed financial adviser. Once you figure out how much to invest, you will be pleased with the opportunities that come up. Natural resource stocks run up double and triple digits in short periods. Unlike the S&P 500, these stocks zoom higher in months, not years. This market is one of the best places in the stock market to find huge gains in short times. 1

3 How We ll Turn Commodity Cycles Into Huge Profits Natural resource investing takes in a wide swath of industries and companies. It s not limited to just oil and gold. We cover energy, mining, agriculture and more: from cement to steel, zinc to fertilizer, silver to sugar and everything in between. Natural resource investing is closely tied to the price of the underlying commodity. For example, it s imperative we know where we are in the gold price cycle before buying gold miners. There are roughly seven stages of a given commodity cycle. Stage 1: Capitulation Capitulation occurs when the price of a commodity falls almost straight down. We saw extreme price declines like this in 2008 and Those indicate more sellers than buyers. In supply-and-demanddriven commodities think agriculture, base metals and energy it means the market has too much supply. We can make money here by owning consumers. To do that, we buy companies that use the commodity whose price is collapsing. For example, CF Industries is a nitrogen fertilizer producer. They fix nitrogen from the air using natural gas. The major cost of the process is the cost of natural gas. As you can imagine, CF s profits and its share price move opposite the natural gas price. You can see what I mean here: The blue arrows show when the price moved higher. The red arrows show when the price moved down. As you can see, the arrows alternate: When CF s arrow is blue, natural gas arrow is frequently red. Of course, the correlation isn t perfect but it s significant. We can use that to make money when natural gas prices fall. That is an important point. There are ways to make money when the underlying commodity prices fall. Falling prices eventually give way to Stage 2. 2

4 Stage 2: Bottom It s tough to know when the bottom is in until after the fact. The highlight is extremely negative sentiment. Remember, markets are collections of people. When sentiment is overwhelmingly in one direction (either negative or positive), that marks tops and bottoms. This is the point in the cycle when no one wants to speculate on the commodity anymore. Our most recent bottom in nearly all the commodities happened at the end of 2015: Oil hit $26 per barrel, its lowest price since Gold fell to $1,051 per ounce, its lowest price since Silver fell below $14 per ounce, its lowest price since The Commodities Research Bureau (CRB) Index is the like the Dow Jones Industrial Average for commodity prices. It fell to its lowest point in 20 years. Take a look: The CRB Index This chart shows the whole cycle, from the bottom in 2009 to the top in 2011 back to the bottom in As you can see, in 2009 and 2016, we had steep falls to a period of low prices. That s what capitulation looks like. Money stops flowing in. There are no buyers, so prices plummet to historic lows. Once the bottom is in, we begin to see Stage 3 recovery. Stage 3: Recovery When everyone bets in one direction, we must bet opposite. That s called contrarianism. As my good friend Rick Rule, the noted natural resources investor, says: We in natural resources are either contrarians or victims. Contrarians drive the initial recovery. They are the first speculators to say, That s cheap enough. Remember back in early 2009? We were neck-deep in a financial crisis. Many investors thought it was the end of the world. However, there were folks (like me) speculating on junior mining companies. These are considered the least valuable stocks in the world. They have no assets. From 2007 to 2009, they fell 99%. The TSX Venture Composite Index is home to nearly all the junior mining companies that matter. Here s what that chart looked like in Stages 1 and 2: 3

5 Junior Mining Companies: Stages 1 and 2 The index of these junior stocks fell over 80%. I remember buying shares of my friends company for $0.06 and $0.07 per share because I knew they were too cheap. I wasn t worried about a fall to $0.03, because I was willing to hold on. The world still needed miners, and these people were among the best of the bunch. That was a time when folks were worried about everything. Most took big losses on stocks, real estate and other investments. We all knew people who had lost their homes or their jobs oftentimes both. It was ugly. However, I knew it was time to buy that small mining company. One of my colleagues, who has a Ph.D. in currencies, actually took out a mortgage on his house to buy stocks. To this day, it was one of his most profitable investments. I sold that stock when it neared $2, and my friends went on to sell the whole company to Goldcorp for $520 million. The world didn t end, and those few contrarians who mustered the courage to buy did very, very well. The recovery period can be a fun and lucrative time, even for investors who don t get in early. As shares go up, more investors find the courage to buy. As the money flows in, shares go up more. Soon, all the stocks in the sector are rising on a tide of investor confidence. And when that confidence passes from rational to irrational, we enter Stage 4. Stage 4: Irrational Exuberance In the late stage of a bull market, everyone knows it s going higher. I ll never forget when Goldman Sachs analyst Arjun Murti predicted oil prices would hit $200 per barrel. The market lost its mind It was May I was, once again, a contrarian. I knew that both the supply and demand forces made that highly unlikely. On the demand side, as gasoline prices rose, people conserved. In the U.S., 60% of every barrel of oil became vehicle fuel. If folks began to drive less, it would push demand down. At the same time, high oil prices make all sorts of new oil available. Let me put it this way: There s a whole lot of oil in the world. We don t use it because it s just too expensive to produce. The world s oil sands are a great example. 4

6 If you are willing to sift sand out of tar, there are 2.2 trillion barrels of oil in place in Canada. The Orinoco Belt in Venezuela holds another 1.2 trillion barrels. They exist but it is expensive to produce them. As the oil price climbed higher, many other sources of new oil came on line. That s exactly what happened. Gasoline demand fell 16% as the oil price peaked in July 2008 to September There was no $200-per-barrel oil price. There wasn t really much chance of that happening due to fundamentals things you would expect a Goldman Sachs analyst to know intimately. How We ll Use This Strategy to Make Real Wealth I want to thank you for subscribing to my Real Wealth Strategist advisory service. That name says much about the service. After all, we focus on real wealth gold, silver, oil, natural gas, agriculture, etc. to make our money. These areas of the market are underserved by high-quality research. Our goal at Real Wealth Strategist is to provide you with hedge-fund-quality research and analysis in a language that anyone can understand. You don t need a Ph.D. in finance to make money in these markets. It s all about strategy. We chose the word Strategist for the title deliberately. That s because in the world of natural resources, we are most often speculators. There is a fine line between speculation and investing. However, an investment usually involves an underlying asset something of value that secures at least part of our capital. Speculations typically lack that asset. We buy shares of beaten-down companies that are often worth little on their own. Our strategy is to buy them when the value of their product oil, gold, uranium, wheat, potash is rising. We aren t investing in the business itself, per se. We are speculating on the business because of the rising value of its products. Take Teck Resources, for example Back in late 2015, Teck Resources was an ugly company. Its market value was just $3 billion down from $7.1 billion six months earlier. Its share price peaked in December 2010 at just over $60, then plummeted back to less than $4 by December That s a crushing 93% fall in five years. At the end of 2015, Teck owed about $9.6 billion in debt and had just $1.9 billion in cash. Its operating income was a paltry $164 million on revenue of $2.1 billion. That s an 8% operating profit a terrible business by any measure. However, the end of 2015 was the bottom of a long bear market in all the things Teck produced: coal, zinc and copper. Speculators willing to hold their noses and take a risk on the rising prices of base metals and hated coal took a big risk and made a huge gain. Shares of Teck Resources bottomed in January 2016 at $2.66 per share just to rocket higher. Today, shares are over $22 each. That s a 738% gain in 15 months. As we discussed, Teck isn t some microcap penny stock. This is a multibillion-dollar mining company that turned every $1,000 invested into $7,380 in profit. This example shows just how profitable natural resource investing can be even with giant, multibilliondollar companies. That s why we call our service Real Wealth Strategist: No fundamental investor in his right mind bought Teck Resources in early It was too risky. It carried too much debt. It had terrible profit margins. 5

7 Teck Resources: Huge Gains Since 2015 But the underlying commodities rally sent Teck s stock soaring. Buying Teck to profit from that rally was a great strategy in Sadly, the circumstance that powered shares of Teck Resources in 2016 took a five-year-long bear market to set up. We don t see those opportunities often. That s why we need to take advantage of them when they come. That s OK: When we can make several 100%-plus gains in our holding periods anywhere from three months to three years we can afford to be patient. And when we don t have opportunities quite like that, we have other strategies to make money. What Kind of Stocks Will We Buy? Natural resource stocks are complicated. The trends are cyclical and volatile, and that makes it tough for many investors to make money here. In order to simplify the process, we re going to keep our style simple. Here s how: We re going to buy stocks and funds that are listed on U.S. and Canadian stock exchanges. We are not going to buy and sell commodities, calls or puts. We aren t going to short stocks. We will save those techniques for other, more advanced traders. We are also going to limit ourselves to large, liquid stocks. These are companies like ExxonMobil companies that trade thousands or even millions of dollars in stock per day. We need that because a company s stock has a limited supply. At any given time, there is only so much stock available to buy. If we all place orders to buy the stock, we will compete with each other for that limited number of shares. Sellers will increase the price sometimes enormously. If we stick to large, liquid stocks, we will not overwhelm the supply. That works the same way when we go to sell. If a stock doesn t have anyone who wants to buy it, the price falls. Therefore, if a large volume of shares comes on the market for instance, when a newsletter issues a sell recommendation it can smother the share price. We really don t want to do that, hence our strategy to use large, liquid stocks. If we absolutely have to buy less liquid stocks, we ll post strong warnings about liquidity and specific directions on how to buy and sell that stock. 6

8 How to Buy and Sell Shares You ll get between 12 and 15 trades in a typical year. Each stock recommendation will come with simple directions on how to buy it. These directions are important, and they will often require us to be patient and disciplined. I ll always send buy alerts while the market is open, from 9:30 a.m. to 4 p.m. Monday through Friday. That s also when I recommend you take action. Prices tend to be higher and more volatile after hours. I know some traders like to spread out their purchases and buy parts of their position on multiple days. That s your prerogative, but I prefer to buy my entire position at once. I ll give you a limit so you know when not to buy, and with the kinds of gains we re going to make high double- and triple-digit even if the price fluctuates a bit, it won t make much of a difference. As I said above, I will give you buy-up-to prices. That means you should not pay more than the buy-upto price per share. That s because buying activity can sometimes trigger momentum traders. These day traders look for abnormal volumes of buying or selling and jump in at that time. For example, if all our readers are buying the same agricultural stock, we will make the volume of shares traded go up. If a few momentum traders notice and begin to buy blocks too, the share price will climb But the momentum traders aren t going to hold the stock. They will sell either at the end of the day or within the next few days. Let s say our buy-up-to price for that agricultural stock was $5 per share. The day after the recommendation, 5,000 readers each buy 1,000 shares. That is 5 million shares and $25 million. That spike will get momentum traders rolling. That s why we re also going to use limit orders on our purchases. Imagine if you used what s known as a simple market order to buy this stock. That means you just tell your broker to buy 1,000 shares of the stock at whatever its price is at the market no restriction. Well, with 5 million shares on order, that price is going up. If momentum traders pile in, it could go up a lot. Let s say it jumps 10% in a day. We get our 1,000 shares at $5.50 per share. That means we started this trade by giving up 10% of our profit potential. I imagine none of us want to give up double-digit profits, right? Once the momentum traders get out, the share price will fall. Sometimes, the momentum traders will turn around and short a stock so our agricultural stock s price could now fall 10% below our buy price. If that happens, the stock s price is $4.50 per share and we re down 18% on our position! However, by using a limit order on our stock, we are protected from that. A limit order tells our broker to buy shares (1,000 shares in our example) up to a set price. You can even add a time limit to the order if you want, like a week or two. It shouldn t take longer than that for the price to come back into equilibrium. That way, the broker knows you want to buy 1,000 shares of the agricultural stock, but you don t want to pay more than $5 per share. In our earlier example, we probably wouldn t get our shares right away. But the next day, as the price fell, we d get our shares. Just as important, limit orders won t spike the volume of shares the same way since the demand is capped at the limit $5 in this case. Selling is the same. When we re ready to take a profit, we need to use limit orders to sell our shares. That tells our broker that we are ready to sell our 1,000 shares but only above a certain price. That protects us from flooding the market with shares and sending the price down. 7

9 When to Sell a Stock One of the most common questions I got from readers over the past decade was: How do I know when to sell? The simple answer is to use what are known as trailing stop-losses. Now, these are going to be internal so you won t set a stop with your broker. A trailing stop is simply a stock price that forces us to sell. We determine that price by deciding how far a stock can fall below its high before we sell it. At first, a trailing stop determines how much of our capital we re willing to risk on our position. For large stocks like those that we re buying, 25% is usually appropriate, although the more volatile stocks will get a 35% stop. In other words, if we buy a stock for $5 per share and use a 25% stop, we would sell if it fell to $3.75. We would leave the position with 75% of our capital still intact. That s important because if we lose 25% of our capital, we only need a 33% gain to recover it. If we lost 50% of our capital, we d need a 100% gain to recover it. I mentioned above that you shouldn t set stops with your broker. See, we don t ever want to make our stops public. This is part of our homework as investors. We track our stops on a spreadsheet or you can simply use the numbers we ll publish in the buy recommendation. If the stock falls below the stop value we re tracking in our spreadsheet, then we sell. Our first rule is to protect our capital. We do that with stops. Stops are critical in speculations because the trends can turn rapidly. Regardless of the amount of work and research we do, there are always risks that can cause stocks to fall. In March 11, 2011, a tsunami hit the Fukushima Daiichi nuclear reactor in Japan. The catastrophic wall of water caused the nuclear reactor to fail. The resulting meltdown was the worst nuclear disaster in modern history. It also killed a highly profitable trade in Cameco a uranium miner. Cameco shares went on a 118% run in the summer of They rose from $20 to $43.50 by February Then the Fukushima disaster occurred, and shares collapsed. Cameco s share price was $37.46 on March 10, It fell to $28.10 by March 17, By November 2011, the price fell under $17 per share. Investors who held on lost over 60% from the top. More importantly, they did not just lose their profits. Even if they bought shares at the bottom in 2010, they lost 15% of their initial capital in just over a year. Those investors turned a 118% profit into a net loss because of a natural disaster through no fault of their own. Shares of Cameco continued to fall. In November 2016, the stock bottomed at $7.46 per share. Today, shares have only recovered to around $10 well below its 2011 highs. Investors who held their shares this long are now down 50% from the low in In summary, holding Cameco shares since 2010 is a seven-year investment that lost half of its initial capital. That s a terrible result. Trailing stops would ve prevented that loss and likely turned it into a modest gain. That s why we use them. They protect us from making stupid, emotional mistakes. I know some of you are already stressing about keeping track. Don t worry. In each issue of Real Wealth Strategist, we ll publish our buy-up-to prices, our trailing stop percentages and the trailing stop price. You can track these values for yourself, too, so that if we hit a stop between publications, you ll be prepared to act. 8

10 Otherwise, you can simply follow the directions for each stock after you receive your latest issue of Real Wealth Strategist. Our goals at Real Wealth Strategist are simple: Preserve our capital, avoid big losses, beat inflation every year and take outsized profits when the opportunities arise. Welcome to the service. I look forward to helping you enjoy trading and making profits. If you have any questions, you can always send me a note at realwealth@banyanhill.com. My team or I will get back to you quickly, and I ll sometimes feature frequent questions in my weekly podcasts. Good investing, Matt Badiali Editor, Real Wealth Strategist 9

11 Banyan Hill P.O. Box 8378 Delray Beach, FL USA USA Toll Free Tel.: (866) Website: LEGAL NOTICE: This work is based on what we ve learned as financial journalists. It may contain errors and you should not base investment decisions solely on what you read here. It s your money and your responsibility. Nothing herein should be considered personalized investment advice. Although our employees may answer general customer service questions, they are not licensed to address your particular investment situation. Our track record is based on hypothetical results and may not reflect the same results as actual trades. Likewise, past performance is no guarantee of future returns. Certain investments carry large potential rewards but also large potential risk. Don t trade in these markets with money you can t afford to lose. Banyan Hill Publishing expressly forbids its writers from having a financial interest in their own securities or commodities recommendations to readers. Such recommendations may be traded, however, by other editors, its affiliated entities, employees, and agents, but only after waiting 24 hours after an internet broadcast or 72 hours after a publication only circulated through the mail. Also, please note that due to our commercial relationship with EverBank, we may receive compensation if you choose to invest in any of their offerings. (c) 2017 Banyan Hill Publishing. All Rights Reserved. Protected by copyright laws of the United States and treaties. This report may only be used pursuant to the subscription agreement. Any reproduction, copying, or redistribution, (electronic or otherwise) in whole or in part, is strictly prohibited without the express written permission of Banyan Hill Publishing. P.O. Box 8378, Delray Beach, FL USA. (TEL.: ) 10

The Mining Coup of the Millennium

The Mining Coup of the Millennium MATT BADIALI S Real Wealth Strategist The Mining Coup of the Millennium THE price of copper fell steadily for five years, losing nearly 50% of its value before finally