The Wall of Worry, Part I

 

For pretty much all my adult life I've been a speculator. That is to say, someone with an appreciation for the relationship between risk and reward, an appreciation far too many people clearly don't share.

Take, for example, ostensibly conservative investments such as money market funds and T-bills. To my worldview, these are just bad jokes being played on the masses. Piling all your assets into increasingly worthless paper paying next to no interest is the financial equivalent of a death of a thousand cuts, guaranteeing that a large swath of the nation's senior citizens will spend their golden years sporting paper caps while tossing fries. My view is that, certainly in today's world, it's much more prudent to risk 10% of your capital with a prospect of getting a 1,000% return than risk 100% of your capital for the prospect of a 10% (or less) return.

This brings me to the current market in natural resource stocks, a sector in which I have been an active investor for over 25 years. That's enough time to have witnessed all manner of cycles and market action. As is to be expected, in the early years especially, I made mistakes, most attributable to the hubris of youth. On one memorable occasion, the error was serious enough that I felt the need to spend a day in bed pondering the magnitude of my losses.

But most humans (politicians and most economists being the exception) learn from their mistakes, and I learned from mine. As a direct consequence, I have made considerable money in the resource sector. Certainly enough to retire and hang out in upscale locales for the rest of my life, if that were my wont. (It's not... as you read this, I've just returned from a rock-kicking expedition to a developing gold play in the boondocks of Columbia).

Further, I'm convinced that if I were wiped out tomorrow, I could start with a small grubstake and recoup most of my losses in a few years' time. In fact, I believe I could do it even if I was airdropped into the Congo, with no money at all. And so could anyone with an entrepreneurial spirit, who knows the difference between something's price and its value, and understands how to balance risk and reward.

But there's no need to do anything exotic, starting with nothing. A relatively small amount of money, skillfully deployed in the right market at the right time, can compound quickly.

With that in mind, perhaps the most critical thing for people now in resource stocks is to examine the nature of bull markets. Many believe that, since resource stocks have had such a big move since their absolute bottoms in the 2000-2002 period, the bull market is, if not over, at least long in the tooth.

I don't think so. And the reason goes back to an understanding of the way bull markets work--at least major, secular bull markets. They generally have three stages: 1) Stealth, 2) Wall of Worry, and 3) Mania.

The Stealth Phase

The best time to buy in any market is when shares can be purchased on the basis of value alone. Of course that's generally only possible when nobody wants to own them because they've been so beaten up in the previous bear market. It's then, when people are most bearish, that new bull markets are born--quietly, unbeknownst to almost anyone. That's why I term the first stage the Stealth phase: it's there, but nobody can see it.

In March 2002, for instance, when the risk-averse investing masses wanted nothing to do with precious metals stocks, I wrote this in the International Speculator, (Vol. XXIII No. 3), complete with the uncharacteristically hyperbolic punctuation:

"Junior gold stocks are the most volatile securities on the planet, with the possible exception of lately minted Internet stocks, and the market is still off about 95% from its previous peak. THIS CONTINUES TO BE THE TIME TO BACK UP THE TRUCK. If I could call your broker for you, I would.

"What we're looking at is a rare opportunity, perhaps twice a decade in the resource stocks, to make a real killing. The last time it was this good was Jan. 1993. In fact, now is actually the best time to buy gold stocks (and they're usually terrible things to hold) since 1971, when the dollar was devalued. Gold is now, in real terms, almost as cheap as it was at $35 back then; silver is considerably cheaper than it was at $1.29."

Attentive subscribers joined me in making a lot of money by buying solid resource stocks while they were almost being given away. Another term I use for the Stealth phase is the "Easy Money" phase, because almost anything you buy in this stage will make you a lot of money, and with little actual risk--although perceived risk is very high.

Then, as is the nature of things, word got around and investors began rediscovering the resource stocks. Two things happened, as they always (predictably) do.

One, a new wave of investors started pouring into the sector, eager to join in the fun and willing to throw money at any good story (and most are good stories... whether those stories are fact or fiction, is another matter).

Two, a new wave of resource companies were launched to meet the demand. Resource conferences whose exhibit halls had previously been suitable for yodel practice filled up with clamoring hordes of cash-waving investors, who were met in force by resource company executives happy to relieve them of that cash.

Predictably, the tsunami of money--much of which hit the market in the second half of 2003--floated all boats, pretty much regardless of merit. The new money, however, put an end to the Stealth market. Early investors looked like financial geniuses and began to believe trees grow to the moon. Actually, they will--but not until the third stage of the bull market.

The flood of money also did one more thing: it provided the juice needed by the well-run companies to lock up new properties and fund the exploration required to come up with a find.

***

Check back next week--you don't want to miss the second part of Doug's article on how to recognize and how to run with a bull market.

The "Wall of Worry" article, by the way, was originally published in the May 2005 edition of the International Speculator, Doug's legendary newsletter that has been vastly successful for over 25 years.

Also part of the May 2005 edition were BUY recommendations for 10 natural resource stocks.

If you had read the International Speculator back then and invested the same amount of money in each of said stocks, you would already have had an average return of 19.1%*--after only two months.

Our so far best-performing stock, an energy company, has risen 70.8%* since Doug's recommendation in May.

That's already significantly more than the average return from your typical mutual fund... and we've barely started.

It's not too late to profit... in fact, we're in the "quiet phase" of the natural resource sector right now when brokers are on vacation and mining companies are feverishly probing and digging, with no time for public relations.

It's what Doug Casey likes to call the "Shopping Season," an ideal time to buy on weakness and back up the truck before the summer break is over and the bull is assuming its wild ride.

You can now try out the International Speculator with no risk at all: You have 30 days to decide whether you like it enough to keep it--with Casey Research's 100% money-back guarantee. And even after that, whenever you cancel your subscription, the unused portion will be refunded to you.

Click here to order now--and be one of the winners in the natural resource bull market!

* at the time of this writing (7/25/05)





Posted 07-26-2005 1:10 PM by Doug Casey