Editor's note: Folks are making a mistake when it comes to investing in natural resources...
They want to buy the popular names that are rising now. But in the long term, that mentality will bring them disappointment once the trend dies down.
In today's Masters Series, originally from the February 27 issue of the free DailyWealth e-letter, natural resources expert Rick Rule explains why you should ignore the hype around commodity stocks and focus on the businesses that will endure even in bad times...
The Most Important Word in Commodity Investing
By Rick Rule
In my 50 years as a natural resource investor, I've made my share of mistakes.
But I've also made some decisions that delivered life-changing results – for me and the people who trusted me with their capital. And I can tell you that the most important concept comes down to one word that has guided my best investments...
It isn't "alpha," or "risk-adjusted returns"... or even "leverage."
It's inevitable.
Most commodities investors confuse inevitable for "imminent." They want immediate gratification. They want a narrative reflected in price as soon as possible.
But in this business, that kind of thinking is dangerous. It will lead you to chase momentum, buy tops, and sell bottoms. But if you're patient, the inevitable has to happen. The timeline is uncertain, but the outcome is not.
That distinction has made me more money than any model or market call.
Let me explain...
Commodity businesses are simple in principle... but brutal in practice.
They're capital-intensive and cyclical. The market sets the price of what they sell. And when prices fall below the cost of production, pain follows. Exploration stops. And smaller producers go bankrupt.
But here's the catch: Commodity bear markets bring about their own destruction...
If prices stay low long enough, supply disappears. And if a commodity is essential, demand won't disappear... so the price must rise.
That's inevitability.
This is exactly what I saw with uranium in 2017.
At the time, prices sat around $20 a pound. But the cost to produce uranium was closer to $60. The industry was in forced liquidation. Supply was vanishing.
But reactors still needed fuel. In fact, more were being built.
So I asked myself: What's more likely to happen, the uranium price rises... or the lights turn off?
That's inevitability. And it led to $100 uranium by January 2024.
Most investors see the logic, but they demand immediacy.
But inevitability doesn't come with a stopwatch. Markets can remain irrational longer than most people can remain patient. That's why timing is the enemy of inevitability.
I've been early more times than I can count. In some cases, I've been six years early. That's not comfortable. But it's survivable... if you size your positions properly, demand value, and focus on balance sheets and staying power.
Here's the truth I've found: If you buy inevitability at a discount, time becomes your friend. You don't need a catalyst tomorrow. You just need the cycle to resolve.
And in commodities, it always does.
That's why I apply a basic checklist whenever I'm looking at a new opportunity...
- Is this commodity essential to the modern world?
- Is it priced below the industry's average cost of production? If so, supply is likely to shrink – pushing prices higher.
- Is the industry in liquidation or distress? That's when the best assets go on sale... and I get interested.
If the answer is yes to all three, I start looking for companies with strong assets, good management, and a decent balance sheet.
This setup has delivered me – and my investors – 10-fold and 20-fold returns.
One word of warning: Too often, investors confuse what's fashionable with what's inevitable.
A few years ago, every conference was buzzing about battery metals and green energy. It was the beginning of the environmental, social, and governance ("ESG") wave...
People were throwing money at lithium and cobalt plays. The narrative was hot, the money was flowing, and valuations were absurd.
But just because something is fashionable doesn't mean it's investable.
The best time to buy lithium wasn't when every Tesla (TSLA) investor was obsessed with it. It was when the commodity was unprofitable to produce and no one wanted to hear about it. That's when a surge becomes inevitable.
Unlike fashionable investments, inevitability often looks boring... ugly... or politically incorrect.
That's why it's cheap. And that's why it works.
So if you're investing in natural resources, your timeline needs to outlast the headlines.
The edge doesn't come from guessing what's going to be hot next quarter. It's in patiently backing what must happen over the next several years.
For investors, inevitability is a compass. And if you learn to trust it, it can guide you to extraordinary returns... regardless of how the market is behaving today.
Regards,
Rick Rule
Editor's note: China is about to cut off critical resources to the U.S. In response, our government is racing to create a "Fort Knox" for these minerals before that 100-day deadline passes. And this window could be one of the biggest investment opportunities of the year.
With the White House scrambling to secure billions of dollars' worth of critical minerals, Rick believes a small group of companies could see demand unlike anything they've ever experienced before. Click here to learn more.
