If This Investor Made This Much, So Could You!

I can’t put this book down!

And, no…it’s not about deflation, money printing, or central banks.

It’s a classic, written way back in 1960.

You may have heard of it, or read it yourself.

If you haven’t, I suggest buying a copy today. The Kindle version costs $1 on Amazon.

The book’s called How I Made $2,000,000 in the Stock Market, by Nicolas Darvas.

Arriving in the US in 1951, Darvas trained to be a ballroom dancer. He became extremely successful and was touring the world by 1956. But meanwhile, Darvas had another passion. Investing.

In his early days, Darvas’ investing approach was…well…gambling — a method no different to punting on oil companies today.

I’ll explain…

Successfully investing in the resources sector

To start, let’s talk more about his investing background.

Nicolas Darvas started his investment career punting on stocks with ‘pretty names’. Of course, this didn’t work out. So, he started reading investment newsletters.

Darvas made a lot of mistakes.

He was an emotional investor, buying near the top of stock market rallies. Instead, he should have remained calm and patient — a skill he learnt later in his career.

Perhaps a bigger mistake, during his early days, Darvas took a punt on nearly every stock recommendation. This is something you should avoid.

Remember, everyone has a different risk tolerance and portfolio balance. Some of the stocks I recommend in Resource Speculator are highly speculative and aren’t for everyone! For this reason, I always suggest punting ‘no more than you can afford to lose’ on speculative stocks. If they work out, you could profit by hundreds or thousands of percent. If they don’t, you won’t lose your shirt, house, kids, and dog.

For example, I recommended that my Resource Speculator readers sell 88 Energy [ASX:88E] earlier in the year. It jumped 500% in five days at the 13-year low in crude oil. From the recommended buy-in price, most readers walked away with a tidy gain of 242%.

Of course, it’s not always happy days.

Like I said, most speculative punts don’t work out. It’s the simple, yet unfortunate, nature of the resource speculation business. The question is: when a stock doesn’t work out, what should you do?

When a stock punt doesn’t work out

Most punters hold them, hoping for the best. But, is that really the best decision?

Honestly, there’s no easy answer. It depends on the business.

If it’s a mature business, with a large market share and a decent balance sheet, it could be worth hanging on for the ride. But, if it’s a speculative company hunting for the motherlode, it’s likely a different story. If it doesn’t work out, cut the stock and look for something else that could make you money.

For example, I recommended Lodestar Minerals [ASX:LSR] to readers in March. The geology looked great on paper. But it was still a punt. At the end of the day, the drill bit determined the story. Unfortunately, Lodestar didn’t find high-grade gold at depth. So I cut the stock immediately. And investors lost 43.9% from the buy-in price.

If readers had re-invested their ‘left over’ money in St George Mining [ASX:SGQ] — another Resource Speculator stock — they could have made back their losses last week…plus a little bit more. St George hit thick, high grade nickel-copper sulphides. It’s now trading more than 100% above the Resource Speculator buy-in price of 11 cents.

I don’t always recommend speculative stocks. My approach is to hunt around the market, searching for the best value. If I thought BHP Billiton [ASX:BHP] had the best profit potential, I’d recommend buying that.

The point is: you don’t have to buy everything you see! As legendary investor Jesse Livermore famously said, ‘Money is made by sitting, not trading.

Livermore didn’t mean the ‘sitting and waiting’ after the stock was purchased — he meant before he pulled the trigger…which brings me to crude oil.

Is crude worth a punt?

Crude’s bear market rally seems unstoppable.

Brent crude, the international benchmark, is trading higher at US$45.89 per barrel. It’s up roughly 65% from the low of US$27.83 per barrel on 20 January. West Texas Intermediate (WTI), also known as US crude, is trading higher at US$44.75 per barrel. It’s up roughly 67% from the low of US$26.05 per barrel on 2 February.

Despite the surge, the supply story doesn’t look flash. According to investing.com,

OPEC’s oil output in April rose to the highest level in recent history, a Reuters survey found on Friday, as production increases led by Iran and Iraq more than offset a strike in Kuwait and other outages.

According to the survey, OPEC’s April output increased to 32.64 million barrels a day from 32.47 million barrels a day a month earlier, reiterating concerns related to the massive supply glut on global energy markets.

Despite Friday’s modest decline, London-traded Brent futures rose $3.00, or 6.69%, on the week, the fourth straight weekly gain. For the month, prices soared 21.5%.

Brent futures prices are up by roughly 45% since briefly dropping below $30 a barrel in mid-February, despite the collapse of talks at a Doha summit in April aimed at achieving a production freeze among OPEC and Non-OPEC producers. OPEC meets on June 2 in Vienna and may discuss the freeze initiative again.’

Indeed, oil production is on the up, not down! Furthermore, fuelfix.com reported that ‘Saudi Arabian crude oil exports are up over 3.5% in Q1 compared to last year’s average’.

It’s clear that crude’s rally isn’t based on fundamentals. It’s driven purely by speculation.

Looking at the demand and supply story, crude should make a NEW LOW later this year. When this happens, crude oil stocks should plunge. Take a look a look at the chart below. It shows the US S&P 500 energy sector’s valuation.

Source: Zero Hedge

Click to enlarge

The S&P 500 energy sector is trading at 101.5 time analysts’ expectations of the next 12 months’ earnings. In other words, large-cap energy stocks have never been more expensive in their entire history, dating back to 1990.

It’s totally unsustainable. If the crude oil price doesn’t stay high and earnings don’t increase, which is likely, oil stock prices should crash.

If you’re looking to buy crude oil stocks, I would be cautious. A number of crude operators may go bankrupt this year. So be careful when choosing oil stocks.

On the other hand, if you pick the best stocks, you’ll make the biggest profits.

When it comes to oil stocks, I’m following this story closely for Resource Speculator readers. If you want to know more, click here.


Jason Stevenson,
Resources Analyst, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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