How To Not Get Killed Trading Natural Resource Stocks
The best way to get rich investing in natural resources goes against a strongly ingrained investment narrative.
It’s one you probably know. You might even follow it yourself: Buy a stock and hold it forever.
My Dad is infamous for doing that. He buys shares and trades in his objectivity for pompoms and a skirt. He jumps up and down when it goes up … and roots for its recovery on the way down.
That system will get you killed in natural resources.
My presentation at the symposium was about the foundation of investing in volatile markets, particularly in natural resources. It’s something I eat, sleep and breathe — and have for 12 years now. That’s why I was surprised that the attendee hadn’t seen it before.
Sometimes I take it for granted that my secret should be clear once you start reading my research. But I was recently reminded that it’s worth sharing with you exactly how I invest in natural resources.
This is the strategy that allows us to invest in a company that’s going up … and to keep us from losing those gains in a market that’s notorious for its volatility.
So I’m going to share how to not get killed investing in natural resources.
You see, the cyclical nature of natural resource markets determines what we do with our money. It’s what confuses many investors. Yet it’s the one thing you must understand before buying a single share of any company in this space … even giants like Exxon Mobil:
Natural resources move in cycles.
Natural resource prices ebb and flow like the ocean’s tides. If you don’t understand that, you will lose money
… all of it, in some cases.
Now let me show you the right way to invest in natural resource stocks: use trailing stops.
A trailing stop is like a moving trigger that tells us when to sell. It goes up as the stock price goes up.
For example, with a 25% trailing stop, you would sell when the stock price closed 25% below its highest price since you bought. So, if you bought at $30, you would sell if the stock closed below $22.50. That’s 25% below $30, or $30 times 75%. If the stock goes up to $40, you would sell if it closed below $30 (75% of $40). And so on.
Let’s apply this to an example, using Teck Resources (TECK) stock over the past 10 years. Like before, let’s say you bought Teck for $30 back in 2007. In 2008, you sold in July when the stock closed at $38.73 — a 29% gain.
You waited out the downturn and early recovery.
You got back in at $10 in 2009. The 25% trailing stop triggered in May 2015 at $34.17. You sold and booked a 242% gain! While you missed the top, when shares ran to $65, you also missed the five-year bear market.
At this point, you’re a fan of Teck. You made 242% on the stock, after all! So, let’s say you bought in to the uptrend in 2016, again at $10.
The 25% trailing stop told you to sell in May 2017 for $17.86. That’s another 79% gain!
If we used a simple 25% trailing stop and bought back in the middle of the trend, we booked gains of 29%, 242% and 79%. And that’s a conservative estimate. If we bought Teck at $5 each time, our gains would be much larger.
In this scenario, if we put $1,000 into the stock each time, we generated gains of $290, $2,420 and $790.
That means your $1,000 in capital generated $3,500 in profits over the past 10 years.
This technique is all about buying stocks that are cheap and in an uptrend. You sell when they are no longer rising.
It’s so simple, isn’t it? Yet the results are incredible. Think about the two results above. Same stock different investment styles. One lost $270 while the other gained $3,500. It really is that easy.