How To Catch A Falling Safe


How do you catch a falling safe? As a physics student, I was taught that the simplest solution is usually the right one, and I have a simple answer to this question. I'll tell you in a moment, but it's so obvious that it may seem worthless, even though the opposite is true, and critically important during times of extreme market volatility.

Consider the old saying: You can't judge a book by its cover. "Everyone" knows this truth, but people judge books by their covers every day. This is important for investors, because while "everyone" knows something is true, they don't always act accordingly. The fact that so many people will follow the herd rather than think for themselves is what creates opportunities for independent thinkers to make a lot of money.

Given that investors in many market sectors are suffering shock from recent volatility and feeling as though they've been trying to catch a falling safe, it's a good time to share my simple but almost universally neglected solution: don't!

If you try, you're almost certain to get flattened. What you do instead is stand by and let it smash while everyone else runs away -- then be first to pick up the cash.

Understand that the reality behind the metaphorical question is really about timing the market. What investors mean when they say they feel like they tried to catch a falling safe is that they bought while prices were still falling and got creamed, realizing painful losses. So, when someone asks how to catch a falling safe or knife without getting hurt, what they are really asking is how to time a market bottom -- even though "everyone" knows that's impossible.

Or they should. Remember what the pros say:

"I can't recall ever once having seen the name of a market timer on Forbes' annual list of the richest people in the world. If it were truly possible to predict corrections, you'd think somebody would have made billions by doing it." -- Peter Lynch

"If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market." -- Benjamin Graham

This is why we at Casey Research do not use 12-month price targets and the like. Such numbers, no matter how thick the research reports backing them, are just guesses. Educated guesses, one hopes, but so full of assumptions, they remain guesses -- as often wrong and as frequently revised as government GDP stats. Instead, we look for trends and then build positions to ride them out, both averaging down and taking profits along the way to mitigate risk.

Back to the falling safe. You stand by (that is, hold cash) so as not to get squashed, and watch the safe smash (i.e., wait for moments of market capitulation). The crash tosses bags of money, gold bars, stock certtificates and other assets every which way. You are prepared to act when others are too afraid or too illiquid, setting you up to buy low and sell high.

Critical Point : Don't worry about timing the bottom; just focus on buying great companies while they are deeply undervalued because no one else wants them, thus making volatility your best friend.

To apply this in real life, look for an essential sector that has been beaten up beyond reason, buy the best of the best companies, and wait for the rebound. This is not market timing but making use of predictable market psychology: overreaction. There is still risk in doing so, but far more upside than downside risk.

You could do this when energy is down to prices that threaten supply, or when agriculture is off so much that farmers and ranchers decide to become dot-com entrepreneurs. People won't stop eating, or needing energy, so these sectors are good bets when they near their cyclical lows.

At the moment, the most beat-up essential sector is mining. Unless everyone on earth is willing to go back to living in the Stone Age, demand for all metals can only grow over time, fluctuations aside. But right now, as you can see in the chart below, mining stocks are on sale as though our world no longer needed copper or iron, or as though global markets have become so safe, no one needs the safe haven of gold.

This chart tracks the 20 largest publicly traded mining companies in the world over the last 10 years. You can see how share prices soared above book value with rising mineral prices up until the crash of 2008, recovered somewhat, but now the market has turned bearish, dropping share prices below book value for the first time in 10 years.

Now that's not surprising, given that miners are getting squeezed between rising costs and falling commodity prices at present; some companies deserve the discount. But the market has clearly overreacted, tossing out the good with the bad. The safe has smashed, and few people can see the jewels among the rubble scattered about.

For example, a gold producer we recommended recently is delivering growth to the bottom line even as gold prices have declined. How? The company has the only legal mill in an area of many rich gold veins operated by small miners whose illegal mills were shut down by the government. This allows our company to pick from the highest-grade suppliers, paying less when gold drops and making a hefty profit almost regardless of the price of gold . The company is poised to double production, but has not been immune to the market crash, dropping from $1.64 earlier this year to about $1.15 when we recommended it. (It's now back up over $1.50 but may go on sale again with the next market fluctuation.)

Taking advantage of volatility when few others have the courage to do so -- picking up the pieces when the safe smashes -- is exactly how we make the spectacular gains we are famous for.

The current downturn in precious metals holds the potential for spectacular gains... but only for those who have the fortitude to buy when nearly everyone else is running away. It's also crucial to know which junior miners are best positioned to succeed... and that's where Casey Research excels. Our team travels around the world, checking out promising prospects from rock-kicking to talking politics with the locals and elected officials, so that we have as complete a picture as possible of the variables that impact a mine's prospects. Put our worldwide boots-on-the-ground analysis to work for you , with a risk-free test drive of Casey International Speculator.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.

This article appears in: Investing , Investing Ideas , Stocks

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