How to Become a Better Investor

One major hindrance to financial success is the “herd” mentality. These folks have been coined “Sheeple” by one of my friends because of the tendency to follow others to an all but certain fate. Sheep get sheared.

Nobody liked crude oil at $35 a barrel, right? And why it is easy to love gold at $950?

These are important questions if you want to get ahead of the herd.

As a young trader I was taught about the “Wall Street Journal Effect” where seasoned traders took profits when an article appeared in the paper. Things have changed with the Internet, which gives access to information like never before, but the premise is the same. Get in early and get out as others start to catch on.

The risks are often lower before a major move. And a breakout can be a confirmation that you are on the right side. By the time most investors are comfortable enough to put in their precious funds, big money has already been made by some. It’s human nature, the fear of missing out may outweigh common sense when choosing opportunities.

Nobody wanted stocks when the Dow was struggling at 6500 but those same people are now testing the waters 2000 points higher.

So what am I looking at now?

Well, as a commodity guy and the editor of Resource Trader Alert I’m always looking for the best moves in hard assets.

A neglected sector that has gotten my attention is natural gas. The last few months have shown resurgence in crude with the global economy stabilizing and demand picking up. Overall crude itself has more than doubled from the lows with nat. gas lagging far behind.

For me the risk on nat gas is on the upside…in other words, I don’t want to risk missing a big upturn. Prices have already fallen from $12 down to under $4 – which is a $40,000 move per futures contract. For my taste the upside potential far outweighs the chance of the downtrend continuing much lower. Gas cannot go to zero, it will always have some value, and many fundamentals can change the present landscape of low, low prices.

Thankfully very few “Sheeple” are grazing on the green green grass from natural gas demand. Significant supplies are used to produce the fertilizer necessary to feed the world. The Potash to increase crop yields has been a big mover the past few years with low grain carryover forcing farmers to get every kernel or pod out of the ground possible. Nat gas also provides much of the electricity to cool our cities in the hot dog days of summer.

The hurricane season is always a wild card that can add risk premium to prices. Any weather disruption can spark an explosion in prices. Katrina and Rita sent prices to all time highs just a few short years ago. You don’t go shopping for an umbrella after the rain starts.

Think of your reaction to possible oil plays back in February when no bottom was in sight. Being ahead of the energy curve is the place I want to be. When things don’t develop as planned the losses at lower levels are manageable and probability is on our side that eventually prices will move up.

Byron King, over at Outstanding Investments gives you a superb list of natural resource stocks – and over the long haul they will outperform the general markets. But if you want to grab some quick trading profit, then you’ll have to plan accordingly. It all comes down to trading discipline, and knowing when to take advantage of a certain sector.

It all comes back to commodities,

Alan Knuckman
for The Daily Reckoning

The Daily Reckoning