Why Commodities and Commodity Stocks? Why Now?

I’ve got to admit that when I first got interested in investing in stocks a few yrs ago and I began managing my own money and doing all of my own research and investing, the thought of investing in commodities and commodity based stocks made me scared, confused and kind of queasy.

Why would I risk my money in a company and a sector of businesses that I did not understand at all? For starters, just beginning to learn fundamental analysis (I did not study finance or investing undergraduate of college like others and my business background is hardly conventional), I did not understand exactly how to value commodity based stocks.

Do I value them on P/E (Price/Earnings) ratios like other companies in other types of businesses? How about P/S (Price/Sales) ratios? How exactly do I measure growth in the company to see if it is growing and how much is it growing? These types of questions and the answers to them all seemed unanswerable and foreign to me when I originally got the “stock market bug” a few yrs ago.

I began reading all kinds of books and doing further research and due diligence on these stocks along with many others on the Internet by using the Yahoo! Finance Message Boards they have for each of these stocks. I studied hard reading books and Internet articles for hrs a day just about every day for 2 yrs or so on everything I could possibly find and asked other, more experienced investors on the message boards as many questions as possible so I could learn and begin to understand stocks in this sector.

I was very lucky and fortunate I found some Internet friends who actually shared their wisdom and experience with me. I began to discuss valuation approaches with other investors for companies in the large commodity based stocks sector and what I found, to be honest, was quite surprising to me. I found that it is much easier and simpler to value these types of companies than I ever dreamed of!

Stuff like the P/E ratio, etc are definitely not the most accurate way at all to value commodity based stocks although they are still somewhat important and they do play a part in terms of a little piece of the very big investing puzzle when you go about doing your due diligence as an investor to see if it is smart to invest or speculate in a specific individual company.

But, I believe I have found the missing, more important and much bigger piece to this specific commodity stock investing puzzle that the average to slightly above average investor has no idea about. My goal is to share this with you and with the rest of the world and to help as many people as I can learn the same valuable things I have learned in a fraction of the time it took me.

I found a much simpler, mathematically provable and more easily quantifiable way to accurately value the stocks of all commodity based companies thanks to breakthroughs in mining, drilling and exploration technologies in just the last few decades. These technological breakthroughs allow companies themselves, CEOs of other competing companies looking to acquire assets cheaply and astute investors like myself and my team at Wall St for Main St. Here’s a video with a sample of the technology I am talking about:

• This technology can more accurately predict and measure (in terms of proven and probable reserve estimates in the US and 43-101 reports in Canada) how much of a commodity or natural resource the company is going to find in an area they are exploring or drilling than at anytime in the past.
• This breakthrough in 3D modeling and mapping allows people to use a mathematical formula based on more accurate data and this “magic formula” for valuing commodity stocks that I and others use (there are different variations of the formula) gives me a very good and conservative estimate of how much the company is worth (market cap), how much each share of the company is worth, etc.  

Mark Twain once described a mine as “a hole in the ground owned by a liar.” As you can see based on today’s improvements in technology, that is not really the case anymore as we are now able to see much, much better and more accurately forecast how much copper, gold, silver, etc is underground based on core drill samples and 3D modeling!

So why do I like commodities so much and why am I so bullish on the companies that drill, explore and mine for them?

In a few words, commodities are the ONLY asset class I have found that offer BOTH offense AND defense! And I have spent a lot of time the last 2 or so years researching and looking for other asset classes that provide this type of downside insurance protection along with virtually unlimited upside. I haven’t found any other asset classes that offer both! Please tell me if you find one and share it with me so I can learn how to properly invest in it!

Ok, so what do I mean exactly by offense and defense? Here’s a clear and concise explanation:

• The defensive part of commodities is the inflation protection.
• The offensive part is the growth of a middle class in emerging markets like China, India, Brazil and other parts of Asia.

The people in those countries want our lifestyle in America. You know the ones we take for granted everyday! I’m talking about electricity running all the time, high speed internet, cars, good food and relatively cheap prices with lots of options to choose from. That’s just a few of the examples. The world’s population is also over 6 billion people and is increasing at an increasing rate.

The bottom line is there is not enough commodities on this planet to support a better lifestyle for 7,8 or 9 billion people. Commodities are finite natural resources; especially energy and metals. Those have to be drilled or mined out of the ground. Everything that is not grown has to be mined!

It is very expensive to get those out of the ground now. So a growing number of people on this planet along with a diminishing amount of natural resources combined with the fact that it costs more and more money to get the resources.

Jim Paplava of Financial Sense Newshour calls this “resource scarcity” and it is perhaps the most powerful trend, besides currency debasement and monetary inflation, going on in the world today!

Quite frankly, there are many reasons to like commodities going forward the way our future world is shaping up.

So why wouldn’t I just buy commodities or commodity futures on a commodity exchange then? You can, but I wouldn’t recommend doing it without the help of someone like a Kevin Kerr and his team of fantastic commodity traders.

I truly think Kevin Kerr is one of the best 2 commodity traders on this entire planet. If you are interested in commodities, want some more hands on help and don’t want to buy any commodity stocks, I would give Kevin a call or an email.

But, if you are going to go it alone, by yourself, without the help of a great commodity broker/trader to help you, I will get into a more detailed argument about why to avoid the commodities exchanges and the futures markets for commodities another time. But, it’s a market full of sharks with an unfair advantage and having no help in the commodities market is asking to get wiped and even maybe owing more money than you originally invested in my humble opinion!