By MoneyMorning.com.au
Diggers & Drillers editor, Dr Alex Cowie has just published a new presentation on where he sees the best investment opportunities for 2012.
As a follow up to the report, we cornered the Doc with some questions we had about the discoveries he’s made over the last 15 months… the bigger picture for commodities in the year ahead… and a few others to boot. Here’s what happened…
Money Weekend: Okay, straight up Alex. Why did you get told to “f*** off” by a copper mining executive?
Dr. Alex Cowie: I introduced myself at a conference and he told me to f*** off because I put a sell recommendation on his company. There’s not much good that can come from a conversation that starts like that. So I told him the conversation was over.
The share price of his company had fallen hard. I decided the time had come to take the loss and move on. This hadn’t pleased our friendly mining exec. But it was the right call – the stock has fallen much, much further since then.
The point is that I work for my readers. Not the mining companies.
My goal is to make money for readers. And if things aren’t going to plan, then I have to take the heat and make tough decisions. I can guarantee it’s no way to win a popularity contest. But the point is, it has saved readers from further losses time and time again.
I want to point out that I have a great deal of respect for the majority of the people in the mining sector. But there are a few rogues out there I can assure you, and I give them a wide berth. Most of them however are passionate, smart people who love their jobs. And getting on site or to conferences to meet them is the best part of my job.
MW: Right, it’s clear you prefer smaller sized companies at the riskier end of the ASX rather than safe blue-chips. Why is that? Wouldn’t it be best (and safer) for our readers to make money from the run-up in commodity prices just by buying BHP Billiton?
AC: Did you put the word ‘safe’ in the same sentence as ‘blue-chip’?
Have you seen Bluescope Steel [ASX:BSL] recently? That ‘safe blue-chip’ has lost 96% in the last 3 years. How about Energy Resources of Australia [ASX:ERA]? Down 95% in 2 years. APN New [ASX:APN] has wiped out 90%. That doesn’t sound safe to me.
As for BHP Billiton [ASX: BHP], investing in big mining companies is about as much fun as a root canal. Since the start of 2009, it’s gained 23%. Compare that to smaller iron stocks like Atlas [ASX:AGO], which has added 270%… or Flinders Mines [ASX:FMS] up 570% in the same timeframe.
The reason many fund managers invest in the blue-chips is because they have vast amounts of money to manage, the big stocks are the only ones large enough for them. Often they’re legally restricted to companies on the ASX200. With these stocks you can risk losing 30%, so you can have a crack at gaining 30%.
And take Australia’s biggest gold stock, Newcrest Mining [ASX: NSM]. Since April, it has fallen 22%. In the same time a South American gold explorer I tipped is up 66%.
Plus, there are around 800 small-cap mining stocks too small for the big players to touch. But this is a rich hunting ground for the everyday investor… if you’ve got some risk tolerance and patience. If you’re prepared to risk losing 30%, the stocks that do perform can often double or triple in price.
My job is to do filter out the duds and identify the stocks which have a real shot. First, I’m looking for companies exploring for, or producing, certain types of commodities. Then, I focus on the commodities that are set to keep rising in the next few years. But the list has gotten a lot shorter in the last six months. The chaos in Europe, a slowdown in China, and stagnating US economy are all making the fundamentals of many industrial commodities look very dodgy.
MW: Long time Money Morning readers know you’re a big fan of silver. And we know that’s a story you have your eye on for 2012. What other big resource trends do you see for the year ahead?
AC: I’ve got a few I’m watching this year. Palladium is a precious metal on my radar – a great deal of it comes from Russian stockpiles which are running out. This will cause a supply squeeze, and may trigger a price rally.
Potash and tungsten are other commodities I’ve backed since the start of the year. And I’m backing them again for 2012. They’re unlikely to be impacted by the global chaos as they’re too important to their end users. Potash is vital as a food fertiliser. And tungsten is used in military applications. Both commodities have risen steadily all year, and I don’t expect this to change.
Next year, I’ll focus more on changing geopolitical trends. China, in particular, is starting to throw its weight around. And the US is going head to head with it. We’ve had the currency war for years, now there’s a trade war stirring. This is a well-trodden path that leads to military brinkmanship. What we’re seeing has all the same signs as the lead up to the Cold War.
So, what I’ll ask next year is: What this means for Australia? And more specifically, what it means for the resources sector?
MW: You’ve closed out a number of winners ranging from 74% gains right up to 125%. But what about the losers? What’s your strategy for when a stock you recommend doesn’t perform as you expect?
AC: I always ask readers to decide their own sell level. Everyone has a different risk tolerance. For instance, you may say a 10% loss is as much as you can handle, so you decide in advance to sell if it falls that much.
Small-cap stocks can be notoriously volatile, meaning they can rise and fall wildly. If you’re used to seeing stocks move by 1 or 2%, it can be disconcerting when the price of a small-cap stock suddenly drops 20%. But this is exactly what can happen with many small-caps stocks that then go on to post gains of 100% or more.
I try to give stocks as much wiggle room as possible. However when a stock falls beyond an acceptable level, I email readers to let them know that it’s time to take the loss, recover their capital, and move on. I don’t publish this level, in order to encourage readers to choose their own risk level.
MW: Over the last year and a half you’ve hardly been in the office. You’ve been to countries like Botswana, Peru, Morocco, South Africa, Dominican Republic, the United States, Hong Kong… the list goes on. Not to mention just about every part of Australia. But what’s the real point in all this travel? Can’t you do all the research you need to from your desk here in Melbourne?
AC: In a word – No.
Put it this way. If you were internet dating, would you marry a person based on their internet profile alone? Ok. Bad example – plenty of people do that. But you get what I mean.
Staring at a screen can only get you so far. It’s my starting point to gather all the publically available information. But I back the people behind a project as much as the project itself. I spend a lot of time meeting with management. In fact, I’ve just caught up with two different companies just this morning [Friday]. I’ve had four coffees so far today – my hands are shaking!
I manage to get on site a great deal as well. What’s not to like about wandering around a wild part of Tasmania, Utah, Peru – wherever the project may be – and talking to interesting mining people? The real reason I go is to get the real story. Believe me when I say it’s helped Diggers & Drillers reader’s dodge a lot of bullets. I sleep well at night knowing I’ve done as much as I can to make sure I haven’t missed anything.
MW: Regular readers of Money Morning often hear us refer to you as “The Doc”. So let’s have it once and for all… what does the “Dr.” stand for?
AC: Early on in my life, I fulfilled a lifelong ambition of graduating as a Veterinarian. That took five years of intense study at the University of Liverpool in the UK. I then worked successfully as a Vet for ten years in seven different countries including UK, Australia, New Zealand, Kenya, Zimbabwe, Nepal and Thailand. This is where the Doctor comes from. I use it because I’ve earned it.
As an adult, my burning ambition became to work independently in the financial markets. People are always surprised when I tell the tale of my career change, but it was the best thing I ever did. The fact is that when it comes to being an analyst, I’ve found the scientific background to be excellent foundations for a career in finance. You need the ability to take on and process a huge amount of information when researching. Plus it prepared me for all the animals in the mining sector (joking).
As for the formal financial training, I completed a postgraduate Diploma in Applied Finance and Investment. I did this in my spare time years ago, and I recommend the course to anyone. I’m now currently halfway through a Masters degree in Finance, which I do on the side. I like learning and intend to make it a lifelong pursuit.
What I like about the markets is that they reward results, not training. And in that respect, I’ve found that having a methodical and scientific approach has been just as valuable in financial markets as it was at the clinic.
MW: Thank you Alex.
AC: No problem.
Shae Smith
Editor, Money Morning
P.S. With the recent sell-off in the gold price, now is a great time to top up on gold. And if Dr. Alex Cowie is right, it’s also a great time to stock up on cheap gold and silver stocks too. If you haven’t seen it yet, make sure you watch the Doc’s latest research presentation for what he says are the six best resource investments for 2012. Click here for details…
What are the Commodities You Need to Place on Your Watch List for 2012?