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ErnestFSC (< 20)

Tales of a Commodity Superstar (AUY,BTU,HAP,PBR,PCU,POT,SLW)

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July 21, 2009 – Comments (3) | RELATED TICKERS: AUY , PBR , POT

As someone who is still trying to pick out a strategy on CAPS I really enjoyed this article by Chris Barker.

http://www.fool.com/investing/general/2009/07/21/tales-of-a-commodity-superstar.aspx? 

By Christopher Barker 
July 21, 2009 | Comments (0)


Welcome to my dark little corner of the investment world. Miles away from conventional wisdom, and concealed from view beneath hovering forests of hopeful green shoots, a CAPS member by the name of silverminerhikes a solitary path.

You will find my approach entirely unconventional -- and potentially very high-risk if my underlying thesis proves faulty -- but by sharing my strategy and experiences with you I hope to promote discussion on a range of investment topics. You can achieve investing success (or failure) by traveling any number of potential paths, but silverminer represents the strategy I personally will follow until I see the U.S. dollaremerging from crisis mode.

A quick background story 
My flagship CAPS portfolio, TMFSinchiruna, became a nightmare of a roller coaster last year. Made up almost exclusively of commodity-related equities, both my CAPS and real-life portfolios took a monster dive that tested my commitment to my investment thesis to the core. From the top CAPS scorer among long-only players in February 2008, I fell to the absolute opposite end of the spectrum. 

Exasperated, I added picks that strayed from my core focus. Second chances are free in CAPS, but not in real life, so fortunately I changed nothing in my actual portfolio and have since found some welcome relief. The whole episode serves as a terrific reminder that my sector-focused investment strategy carries a high degree of volatility and risk. Confidence in my fundamental macroeconomic analysis, however, lessens my own perception of risk.

By the fall of 2008, the massive disconnect I perceived between the deteriorating fundamentals of the U.S. dollar and the continued free-fall in commodity-related equities sparked a renewed commitment to communicate my bullish outlook for dollar-defensive investments. With the passion of all my conviction, I encouraged Fools to consider precious metal producers like Yamana Gold (NYSE: AUY) and Silver Wheaton (NYSE: SLW) at the moment they reversed into a dramatic recovery.

A silverminer is born 
Around the same time, on Nov. 19, I started the silverminer portfolio to focus narrowly on my investment strategy. As a long-term buy-and-hold investor, I find it ironic that timing played a significant role in this new portfolio's outperformance of the S&P 500. Started near the (presumed) bottom of the commodity correction, after four months the portfolio climbed to that same No. 1 spot among long-only players where my original portfolio had once sat. I try to dissuade investors from attempting to time the market, especially a market as volatile as precious metals. Sometimes, however, opportunity smacks you square in the face.

Core holdings for the long haul 
I had a short list of equities and a few exchange-traded funds in mind for each of the four sectors I sought exposure to. I started out with companies like those mentioned above for gold and silver, Southern Copper (NYSE: PCU) for copper, Peabody Energy (NYSE: BTU) for coal, PotashCorp (NYSE: POT) for agriculture, and Petroleo Brasileiro (NYSE: PBR) for oil.

ETFs like the Market Vectors RVE Hard Assets Producers ETF (AMEX: HAP), tracking an index by legendary investor Jim Rogers, helped to round out long-term selections.

Having some fun along the way 
CAPS is more than a game: It's a thoroughly enjoyable exercise. I approach it the way a pilot would think of a flight simulator ... a tool that constantly hones your skills no matter your level of expertise.

To reduce risk, I ended some silverminer picks gradually on the way up. My score would be higher if I had let them ride, but I believe it's important to never regret locking in investment gains.

Any CAPS pick closed while outperforming the S&P 500 by more than five percentage points improves a Fool's accuracy score, and accuracy accounts for one-third of a player's overall rating. To bolster accuracy, I've sprinkled a touch of near-term trading onto my buy-and-hold foundation. In real life, I trade minute positions around my core holdings when I perceive near-term peaks and valleys within the longer-term bull market for commodities, and this is the behavior I seek to mimic in CAPS. When successful, this practice can enhance the returns of a buy-and-hold investment strategy, but it's also a lot of fun!

Only time will tell 
After only eight months, the success of this silverminer portfolio doesn't mean much yet. An investment strategy must outperform over a very long period to be proven viable, but I wanted to share the strategy with Fools in case it helps inform their own deliberations about strategy. Outperforming the S&P 500 by 36% since November, the portfolio has experienced a nice start, but doesn't hold a candle to the long-term 42% outperformance by Motley Fool founders David and Tom Gardner with their flagship Stock Advisor newsletter service. I stand on the shoulders of giants, but I'm learning every day. Start your own CAPS portfolio today, and learn alongside me.

Further Foolishness:

The mortgage crisis is far from over.Please don't shoot the messengers.The scariest balance sheet of all.

Fool contributor Christopher Barker thinks stagnation is scarier than change. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Peabody Energy, Silver Wheaton, and Yamana Gold. The Motley Fool's disclosure policy wants to know what diversification means to you.

3 Comments – Post Your Own

#1) On July 21, 2009 at 2:29 PM, outoffocus (23.65) wrote:

Then you need to add TMFSinchiruna to your favorites list.

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#2) On July 21, 2009 at 2:34 PM, ErnestFSC (< 20) wrote:

Good Point! Done.

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#3) On July 21, 2009 at 6:07 PM, XMFSinchiruna (27.98) wrote:

ErnestFSC

I'm really glad you enjoyed the article. For reasons outlined in this article, I certainly would not recommend that anyone mimic my strategy unless their own comprehensive research led them to draw the same conclusions with a similar degree of confidence. When the chips are down as they were for me last summer and fall, you need to rely on the strength of your own conviction rather than the strength of someone else's. :)

From Tomorrow's Monster Move in Gold:

"How much confidence do you have in your position? This critical question will help investors understand whether they are ready for the looming volatility in gold. I expect price volatility to increase substantially in the months and years ahead, with daily moves like this $90 leap after the Lehman Brothers bankruptcy providing a mere glimpse of what's to come. To avoid selling into weakness, I recommend that Fools reflect upon their own tolerance level for gold's painful corrections."

Please also consider my counsel from this article, Considering a New Investment Paradigm:

"At some point, it all boils down to your fundamental outlook on the state of the economy. If you believe that everything is under control as the Fed and Treasury juggle the largest fiscal interventions ever attempted by our species, that green shoots are preparing to blossom, and that the U.S. economy will be dialed back into growth before you can say re-allocation, then you may decide to change nothing. Those who share my expectation for significant devaluation of the U.S. dollar, and an unfortunately prolonged period of contraction for the U.S. economy, may crave an alternate approach."

"While I hardly expect Fools to condone my degree of exposure to volatile precious metal miners like Agnico-Eagle Mines (NYSE: AEM) and Pan American Silver (Nasdaq: PAAS), or bullion proxies like Central Fund of Canada (AMEX: CEF), I continue to suggest that the conventional 5% to 10% gold allocation is quite conservative given the mounting macroeconomic headwinds against the U.S. dollar."

"Conventional wisdom is dynamic, and I submit that this financial crisis is one of those events that can bring accelerated shifts. For example, the conventional wisdom (touted by Alan Greenspan) once held that housing prices would remain in a state of perpetual rise, seeing only variable growth rates but never experiencing a sustained decline. We now know that was pure fantasy. The wisdom within conventional wisdom can change over time, and so can successful investment strategies."

 

Finally, one does not need 85% allocation in anything to have meaningful exposure. 85% works for me because I'm willing to bet the farm that I'm right, but for anyone who's feeling less certain about the macroeconomic future, a 20% allocation into dollar-defensive plays could provide a substantial buffer the greenback's decline without placing all one's eggs on one basket.

The important thing, in my opinion, is that investors reassess the traditional common wisdom that recommends 5-10% allocation in gold. I think at least twice that allocation is wholly appropriate under the circumstances ... even for those who may feel less confident about their own expectations about the future.

 

ErnestFSC, I just looked at your CAPS profile, and it looks to me like you may be a new arrival to our fair community. If that is so, welcome!! I encourage you to add the silverminer portfolio to your favorites list as well, so you can track my activity there if you wish.

As you prepare to build your own CAPS portfolio, please feel free to hit me up with questions about specific companies or anything you'd like help with.

And finally, don't just listen to me. I'm merely one voice in a vast wilderness. CAPS is full of some very talented investors who have achieved success in their CAPS portfolios through very diverse sets of strategies. You'll find lots of members who are more than welcome to help get you started abd provide a sounding board as you develop your investment strategy.

Enjoy the process, and Fool on!

Christopher

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