...Fund-da-mental.... re: Oil and "what about coal " - BINGO !
< well if you bought a house in Florida, or California - you've probably outperformed both Oil and Gold <vbg>/
You brought up a GREAT point - that has been the basis for the point that I've been pounding the table on vis a vis Oil...that not surprisingly falls on deaf Hear No Evil, See No Evil and Speak No Evil Oil Permabull Ears.
While Oil get's all the headlines and obviously has had great returns... it isn't the only sector in the market that has !?!?
The single most profitable thing that I've learned over the last few years, is to always stay focused on Risk versus Reward.
paning4gold asked the question of what led me to exit the Oilpatch in favor of the Gold Sector.
- the answer is simple...
A historic disconnect between risk:reward in the Gold sector....simultaneous to the Oil's being at the upper band of their valuation range and the resulting diminished reward potential - as opposed to rising risk.
When I sold and exited a portfolio weighted position in the Oilpatch in late 2000 - I shifted into the Gold Stock sector that was at a historic low... the upside potential Rewards were Incredible, given where the Sector's Stocks has traded over the years in up-cycles for Gold. Gold was selling well below the cost of production and we all know about the effect of the Central Bank sales, the carry trades etc.
From the point of that Entry into the Gold Sector - the HUI Index went up 7-Fold+ from HUI 35 to HUI 258 ! The OSX from late 2000 into early 2001 cratered...and over time this has been the comparative return over that 5 year timeframe for the Gold Sector vs. Oil...and remember, this chart is showing the Golds now well off of their highs and the OSX right at it's historic high - the Chart says it all:
finance.yahoo.com
The Goldstocks gave us a + 700% Secular Bull and the OSX gave us + 30 points from the oft' seen OSX 130-140 to the now Historic High of 170.
The simple math says it all:
+ 20% for the OSX/Oilpatch Stocks, or + 700% for the HUI/Goldstocks ?
You tell me which one you wanted to be "levered" to - on either a buy & hold, or a trading basis ?
Today, the upside reward potential for the Gold Sector is obviously much lower...as we are no longer at a price for gold below it’s cost of production, nor at a historic Index low and this is no longer "THE" single most out of favor sector in the market....as it was in late 2000.
The upside potential for Gold and Goldstocks is still considerable...but, it requires what in essence will be a collapse in the US Dollar, rampant Inflation or, low/negative returns from Stocks & Bonds.
- all "reasonable" potentialities....but, certainly not the same Risk:Reward Metric's that we had at $255 Gold and HUI 35 ~
Same for the Oilbulls... they've had a great ride - congrats to them. Subsectors within the Oilpatch have had incredible returns....but, not unlike the Gold Sector in it's run over the last 5 years - this is no longer an undiscovered, out of favor, or under-owned story.
Any further significant upside Rewards in the Oilpatch - require a similar set of circumstances to unfold - as the Goldbugs are focusing on...
- a paradigm shift of historic proportion.
Goldbugs are waiting for what in essence will be a collapse in the US Dollar.
Oilbulls are waiting for the Peak Oil thesis to create a Demand:Supply Shock that will be the Mother of all Oil Crisis's
...neither successfull conclusion occurs within either an Economic, Political, or Geopolitical vacuum.
The Reactions in the Marketplace to either an Oilshock, or the Collapse of the US Dollar, or runaway inflation....will create paradigm shifts all throught not just the Financial Markets and Global Economies, but all thru our daily lives.
The question for individual investors is rather simple:
Do I maintain the same portfolio exposure to the "final conclusive chapter" of these "POTENTIAL" stories... or, do I start locking in some of the gains from these major secular moves and start reducing exposure relative to rising risk and diminishing rewards ?
Secondly, are their other potential opportunities that will arise out of the "successful conclusion" to the Gold, or Oil Bull Thesis that offer better Risk:Reward Metric's ?
...this takes us back to your very good point about "Coal" , or "Copper".... or, buying Palladium plays here versus Platinum - anticipating incremental price substitution and rotation once again from platinum as supplies get worked down, back to palladium for catalystic converters.... or, do I have equal, or even greater upside reward potential – with much less downside risk, in playing Coal, or Copper verus Oil ?
ie:
finance.yahoo.com
Has Natural Gas been THE Story, THE play...how about vs. boring alternative commidty names like BHP, or BTU ?
finance.yahoo.com
Which had the better risk:reward metric's - the Natural Gas plays, or a boring, under the radar name like BHP ?
Oilbulls of late, want to tell us "goldbugs" that we've missed something over the last few months (obviously from the 5 year Chart above - we didn't miss much over the last 5 Years <VBG> so let's see what we've missed over the last few months:
My favorite Goldstock and largest positon is in Goldcorp - GG...let's see how it has done against the best Offshore and On-shore Oilpatch Drilling Stocks - NBR & RIG:
finance.yahoo.com
While the Oilpatch has certainly been a great place to be... the reality is obviously that is hasn't been the ONLY place to be... or, even the most profitable place to be...
This spring I did not play the Oilpatch on the longside... I was short Fannie Mae as the largest position in my portfolio, I played a short on some RV-Stocks and made a pretty well timed Short-sided play on the Oilpatch stocks atop their Jan to March run and corresponding selloff and retracement. We had a nice trade in th e HUI from the 190-220 level...and patience and minimal exposure via exiting that trade -presented the opportunity to step back in and re-enter on a Porfolio weighted trade - long the Goldstocks on a complete sector and sentiment washout...and we just got 45+ Index points handed to us... that some of us are putting in right back in the Cash Register... as reality also dictates that this is territory that Goldbugs have passed in both directions - many times.
...45 points is 45 points - Ka-Ching.
Both the Oilpatch and Gold-Pm Sectors have offered the ability to make money in both directions.
While "shorting" is something that the average investor should probably not get into... selling and taking profits into strength and re-entering and buying back on pullbacks is something they can do.
The question both Oil and Gold bulls need to be asking themselves here - is are there other undiscovered and under-owned stories now developing elswhere - that possess better risk:reward metric's; as these headline sectors resume bullish moves ?
Do you have an exit strategy and a plan to retain and protect profits ?
Obviously where and when to take profits is all relative to where one original entered and to what extent you have retained profits, as well as to what one's individual risk:reward metric's are.
If you think a Sector has entered a speculative disconnect such as what we saw in the Tech & Internet and Telecom Stocks during the Nasdaq Bubble from 3500 to 5000 and back down to 1500 - where do you sell ? Do you sell ?
- given that recent historical perspective vis a vis Speculative Excess - is it sometimes smart to just take the money off the table and walk away for good - and not even look back..and worry how much higher the eventual speculative blow off top may be ?
Questions we all need to be asking ourselves...
The biggest mistake any trader can make - is self delusion.
The second - is greed.
Both are made by losing a rational focus on RISK vs. REWARD.
Portfolio and Money Management in regards to Exit Strategies and Protecting Profits are the second half of the equation of great secular trades - and it's the 2nd half of the Equation that most Traders never address untill after the Secular, or Cyclical story has rolled over and they've given much, if not often, nearly all of the gains back to Mr. Market.
Profits aren't profits - untill you take them.
The Mantra for the Hedge, Mutual and Institutional Managers has been the Search for Alpha.... for the Individual Investor it should be the search for Risk vs. Reward and undiscovered, underowned emerging discrepancies between price and risk.
On of the great Portfolio Leaps that could have been made in Natural Resources and Commodities over the last decade was the Leap from Black to Yellow Gold in late 2000, early 2001.
- a 7-fold index run versus 20% and 30 Index points ?
...there's another "LEAP" and Portfolio Shift opportunity developing somewhere - right now...there always is.
THAT is what sharp Traders should be looking for.
Trying to catch that speculative excess blow off top has been the most foolish, of all Fool's Games ... play it if you wish... that "aint" my game no - mo...
I want discrepancies between price and risk and undiscovered and under-owned stories on the longside.
The smartest way to maintain upside leverage when locking in profits when sectors seem to be moving into heady territory is to take a portion of your profits and buy some max out of the money, outlying "call options".
Instead of letting the sector retrace and stopping out on a 10,15,20% pullback... .why not sell into STRENGTH as stories mature and then throw some out of the money calls out there that have 4-5 to even 10-15 times the leverage of common shares...and give you defined exposure and risk...but, maintain excellent upside leverage - with the "House's" Money being at work...
Conversely, for those who trade both Long and Short... I want over-owned, over-known stories that are moving into a reverse disconnect of Risk:Reward via speculation and extreme divergences from historic metric's.
Risk:Reward metric's also work on both the long and the short-side.
There is no single correct sector and no single correct trade.
...there are both great Long and Short opportunities out there right now.
Our Job is to find them....and fwiw; you don't find them by following the crowd...
Good Luck out there,
Great Time to be Cashing in Profits.... if you "really" got 'em (vbg)....or if you have "enough" to be worth Cashing In ~
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