Weeks like this remind us of the old saying, “from crisis comes opportunity.” Never let a good crisis pass without extracting the real opportunities you’re presented.
If there is one conclusion we can reach about financial markets right now, it’s this: it’s easy to get caught up in the drama. From the crumbling Spanish economy to slowing Chinese growth to the fiscal predicament in Japan – there’s plenty of it. And we need to tailor our investment strategy with these things in mind.
But at some point all of it becomes a distraction when looking for stocks to invest in.
As Kris Sayce says at the beginning of his latest report released earlier in the week:
“Stuff the Eurozone. Stuff the bailouts. Stuff the global debt crisis.”
Perhaps you saw this recent headline in The Australian Financial Review: ‘Small Cap Funds Set Hot Pace’: To quote:
The key to managers’ strong returns was their ability to conduct in-depth stock research and accurately select companies that provide the biggest opportunities for growth, said Tom Whitelaw, research manager at Morningstar.
“Opportunities for growth” is exactly what Kris Sayce has been emphasizing in both Money Morning and Australian Small-Cap Investigator. Especially in one key sector: oil and gas.
At the recent After America investing conference, the title of Kris Sayce’s presentation was “Energy Beats Volatility”.
It was a key point to get across.
Stock markets are volatile by nature. You can try to time them if you like. But that’s a difficult task. Kris reckons the more profitable strategy is to focus on the underlying trends that will make certain businesses profitable, even in a bear market.
Are there really industry trends that can defy a bear market and benefit you as an investor? Well, if there ARE such trends, then energy is surely one of them. The world needs energy, no matter what happens in the share market. The demand for energy is not correlated to rising or falling stock prices.
There are some intriguing developments within the energy industry – the kind of developments that can be good for investors. First up, energy production (whether it’s oil or natural gas or unconventional gas) is an extractive industry, just like hard rock mining. But to extract a resource, you have to find it. And not only do you have to find it, you have to extract it profitably.
Today’s energy industry requires more innovation than ever before. Companies are looking on-shore, off-shore, and in every nook and cranny for new resources to tap. And the changes in the energy business – new methods of extraction, new markets to supply and previously undiscovered resources in untapped locations – is driving a huge level of growth and investment.
In the 1970s, business conditions were poor as “stagflation” (inflation but no growth) stuck shares in a bear market and the economy went nowhere.
But oil rose in the 1970′s from $2.80 to over $40 a barrel. Crisis investors who looked for oil drilling stocks, rig suppliers, oil explorers, gas stocks – everything related to the energy industry while demand outstripped supply – made money.
Investor Jim Rogers laid out his strategy at the time (and in general) in the John Train book Money Masters of Our Time:
“Look for change. And by change I mean secular change, not just business cycle change. I’m looking for companies that are going to have good performance even when the economy is going down, like the oil industry in the seventies. A major ten-year change took place in the oil industry.”
As Kris points out in his latest report, great companies always outperform the market eventually.
The advantage of the current environment is volatile swings in price at least give you a chance to buy in at low prices. Instead of fearing these price swings, you can take advantage of them. Most people won’t. For some strange psychological reason, most investors only by stocks once they’re rising. They refuse to buy them when they’re on sale.
Well, shares are going on sale all over the place. If there is any time to embrace risk, it’s when investors are selling and the mood is negative. At some point that negativity becomes fully priced in. Value becomes revealed. Kris thinks that moment is now.
He put it like this in a recent Australian Small-Cap Investigator issue:
“You look for stocks few others are prepared to buy. Then you figure out if they’re undervalued. If they are, you want to know by how much. A lot hopefully. Because ideally, as a small-cap investor you want explosive growth… triple digit percentage gains. Where the market has almost ignored a company’s growth potential.”
To find out five great small-cap stocks Kris believes the market is completely ignoring right now, watch his latest video, right here.
Callum Newman
Editor, Money Morning
The Most Important Story This Week…
One of key ratios in finance is risk versus reward. Without risk, there is no reward. The flipside is there is always a probable chance of making a loss. When investing in a volatile asset class like shares, the key is to have a risk management system. Slipstream Trader Murray Dawes excels in this area. He takes a calculated approach to minimise losses and maximise gains. He does it in the knowledge that a trader will lose occasionally, but his accumulated winners will leave him ahead over the long term.
Kris Sayce recognises the same thing. Shares that have small market capitalisation – his specialty – are higher risk. But they provide one of the biggest opportunities in the share market for huge percentage gains. These can be the engine of your overall portfolio performance. And while only risking a minimal amount of your hard-earned money. Current volatile swings in shares prices give you a chance to buy in at a lower price. It’s one way to take advantage of the uncertain financial market today. Kris adds more in Why You MUST Speculate.
Other Highlights This Week…
Shae Smith on Why Inflation Figures Are Deceptive Government Statistics: “Inflation numbers are a joke… Rather than being a measure of the cost of living, it’s about the US government reporting the lowest inflation number possible. In this article, we’ll show you why you can’t trust these statistics, who you can trust, and how to minimise the impact inflation has on your purchasing power.”
John Stepek on QE: Why We Can Expect More Money Printing from Central Banks: “What’s really worrying is that, as Justin Knight of UBS tells the FT, ‘the international investors who have left the Spanish bond market will probably not come back’. That suggests that the poor appetite for the bonds means that Spanish banks – the main buyers these days – might be ‘running out of LTRO money and therefore stop buying as well’, which would be ‘serious news for the market’.”
Karim Rahemtulla on The Turkish Economy: Knocking At The Door: “Turkey does have a reputation for instability when it comes to politics. One of the main reasons for this is the struggle between those with a religious agenda and those with a secular one. Throw in a very active military sworn to protect Turkey’s secular constitution and the possibility for volatility exists.”
Nick Hubble on Inflation and Sovereign Debt – Why The Best Is Yet To Come: “Was it good while it lasted? A world where Australia dug, China made, America consumed and Europe united. Doesn’t matter much anymore. It’s over. The really important questions are: what’s next? And what do you do about what’s next? “
