Friday, August 12, 2011

The Trick To Making Money In Markets

The real trick to making money in markets lies in the ability to spot a trend and place capital in its path.  Most investors never accomplish this because they fail to work up the courage to believe the small voice within that says, "Wait a minute, something doesn't look right here."  There are good reasons for squelching this voice.  If 20 years of formal education designed to teach you to follow orders wasn't enough, working for a major corporation will finish the job.  We are taught that coloring outside of the lines is dangerous.  To us, the danger lies in the enslavement found within the lines.

Next time you are in a social setting where group-think is rewarded, suggest alternative energy as a topic.  After a few monologues on solar power and windmills (which can't be built without rare earth elements) suggest that nuclear seems like the logical solution.  Brace yourself for the ensuing reaction.  This is truly a hated power source.  If you seek permanent dislocation from the group suggest that 30,000 people died in the tsunami and 0 have died from the nuclear incident.  When something is this hated it immediately commands our attention.

Fossil fuels, specifically oil, have remained our choice energy source due to their low cost of extraction and simple structure.  Most people are not aware that we are running out of oil.  To be more specific, oil is becoming marginally more difficult to produce.

As you can see in these two charts, the known supply of oil has been eclipsed by demand.  This is more than significant if you drive a car, eat, consume power at your home, wear clothing or use toothpaste.  That is correct, one of the main ingredients in toothpaste is the petroleum used to make the packaging.

When we say there is difficulty on the margin we are speaking to the demand associated with the last barrel purchased or produced.  To further explain the effects of this, there are now several users fighting for that last barrel and someone will go home empty handed.  Currently there are around 4mil bpd (barrels per day) that we can assume are fought over.

This will take a while to permeate the economy.  It will take even longer for people to understand what the problem is.  It will take yet another period of time while US citizens demand a law be passed to give them there fair share of oil.  One day though these options will have been exhausted and there will be fierce competition for fossil fuels.

Once we understand this concept interest develpops in alternative fuel sources.  There is only room in our portfolio for low cost sources.  Solar, wind, hydro and geothermal are all great sources but will never represent 10% of fuel needs.  Consider this statement found on the Department of Energy's website:
Uranium is the most dense naturally occurring fuel on planet earth that we are aware of.  Also, when considering all factors, it is arguably the most green.  Three accidents occurring in plants using 1960s technology dominate public opinion on the subject.

What are the facts?  Why is Saudi Arabia building 16 reactors for power generation?  Why are China and India rushing to expand their nuclear power base?  Why do we only hear about Germany closing a dozen reactors 8 years from now?

This is they type of market that we see offering large capital gains.  Well run mining firms are selling at prices reflecting nothing short of pure hatred.  Many fail to consider that physical uranium is trading at a spot price 30% higher than a year ago.  As the price continues to rise on the back of fundamental demand, look for shares in mining companies that have low per-pound operating costs.  Finally, competent and experienced management along with a reasonable share structure must back up good operating fundamentals.

When a sector is this hated all of the risk has been sold out of it.  Now is the time to acquire dirt cheap shares in well run firms.  It may take a while for the world to wake up and realize that there is no other solution for its energy needs.

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