This Scary Market Offers Hope For The Brave

The bad news keeps coming, with Bear Stearns collapsing and the US Federal Reserve Bank taking the chainsaw to US interest rates. Australian shares have not been spared.

But there is some brighter news. This week, the gold price surged to a record high above US$1,030 an ounce. We celebrate by looking at two smaller gold stocks we think are uniquely placed to benefit from rising gold prices.

We urge nervous investors to hang in there, and encourage gutsy investors to look to accumulate selected resources shares whilst they are cheap, like the two small oil companies we look at below.

Dear Battered and Bruised Stock Market Investor,

This was the week when real fear gripped global stock markets.

The effective failure of what was the 5^th largest US investment bank, Bear Stearns, sent shock-waves through the market. The market was effectively saying “If an institution like Bear could effectively go bust, others could too, and I’m not sticking around to find out which one.”

It all ended up in Wall Street playing a game of “Who’s Next?” as nervous, jittery and outright fearful investors indiscriminately sold out of financials.

We have market pundits talking about the current credit-crisis and the Great Depression in the same breath. We have references to the 1987 stock market crash, as witnessed by this quote in The Australian Financial Review by ABN Amro equities strategist Greg Goodsell…

“Arguably 1987 was a bigger market correction at this point…but in terms of broad based concerns on confidence in the market, it is probably the worst I have seen for a while.”

Welcome to the Great Bear Market of 2007-8.

There’s A Vicious Bear In There

Make no mistake, we are in the grip of a vicious bear market. In bear markets, investors can do one of two things.

1. Succumb to fear and 'get out'.

2. Be very careful, preserve capital as best they can, and be ready to take advantage of the attractive stock prices that bear markets inevitably produce.

There are no prizes for guessing which camp we are in here.

Take Advantage Of Fear

We encourage our Members to do the latter. Dumping shares for no other reason than fear creates the sort of opportunities we are hoping to find. Our aim is to take advantage of fear, not be held hostage by it.

To this end, over the past six months or so we have mostly been recommending gold, oil and commodity based companies, and recommend avoiding financial and banking stocks.

Banking stocks have been absolutely hammered, with the S&P/ASX 200 Banks Index down a massive 33% from its November 2007 high. Ouch.

As for oil and gold, even though oil recently hit a record US$110 a barrel and gold also hit a record US$1030 an ounce, not all oil and gold stocks have risen. In fact, some have fallen quite savagely, particularly smaller oil and gold stocks.

A Bear Market Teaches The Best Lessons

We are in a bear market. No investor is immune from declining share prices. To paraphrase Richard Russell, octogenarian editor of the Dow Theory Letters; everyone loses in a bear market, he who loses least, wins.

So don't be disheartened by paper losses. Everyone is experiencing them. If you're genuine about being a long term investor, experiencing a bear market is one of the best educations you can get. We'd guess that more lessons are learned in a six month bear market than a six year bull market.

There is one other point to make about a bear market – money flows from the small companies to the large companies.

The share prices of many small companies have been hit hard despite having sound earnings, business models, and little of no debt. As the need to raise cash from margin calls sweeps the market, the smaller, illiquid stocks are usually the hardest hit.

Selective Buying Of Small Companies

In our view many small cap stocks are trading well below their actual value. So if you're holding sound companies at the smaller end, sit tight. You might even start selectively adding to some of your existing small company holdings, and adding new positions.

Having said that, be aware that in bear markets, stocks can trade below value for some time, and there is nothing to stop the share price of a company that looks a screaming bargain today falling even further.

How To Lose Over $1 Billion

Just ask billionaire investor Joe Lewis, the second-largest shareholder in Bear Stearns. Having spent almost US$1.2 billion to accumulate 11 million Bear Stearns shares, following JP Morgan Chase’s “takeover”, he is staring at a loss of close to a cool US$1 billion.

However bad your own personal stock market losses, they won’t be as bad as those just incurred by Joe Lewis. Still, we are sure some people are sitting on losses they consider significant, and that’s always difficult to swallow.

At this stage it is worth reminder people about the difference between paper losses and permanent losses.

A Paper Loss Is A Bearable Loss

In a bear market like this, where most share prices are falling, paper losses are commonplace. A paper loss happens when a fairly valued or cheap company becomes cheaper, despite the underlying business remaining largely unchanged.

Take one of our old favourites BHP Billiton for example. Late last year, the shares peaked at over $47. Today they trade around the $38 mark. Yet in 2008 alone, the prices of aluminium, copper, nickel, tin and gold have all risen by more than 20%. Iron ore contract prices are expected to rise by 60-70%.

We think BHP shareholders who bought at $47 are today sitting on paper losses, and that over the medium to long term, their investment at $47 a share will turn out to be a good, profitable investment.

Compare that to people who bought Allco Finance Group when they traded at $12 under a year ago. With the shares today trading around 32 cents, they have unfortunately incurred a permanent loss. Even if the share price were to triple from here, their loss would still be over 90%.

Commonwealth Bank shareholders who bought at around $60 late last year are facing a very long wait before they make a profit on their capital. The shares today trade at around $38, meaning they would have to rise close to 60% for an investor to get back to break even.

That is not going to happen any time soon. On the contrary, we think Commonwealth Bank and other Australian banking shares are more likely to fall than to rise in the weeks and months ahead. But more on that next week, including why we think Australian house prices are in real danger of falling.

The Market Remains Bearish

The short term outlook for the stock market remains bearish. The main source of anxiety is the ongoing contraction and accompanying uncertainty in global credit markets.

The whole de-leveraging process has resulted in forced selling, lower prices and a fresh round of margin calls. It’s a vicious downward spiral. Investors are incredibly nervous, fearing another Bear Stearns (US), another Northern Rock (UK) or another MFS (Australia), just to name a few ultra-distressed financial companies.

In such an acute de-leveraging process, no asset is entirely immune. When large amount of debts need to be repaid, there is a rush to liquidate assets. There are generally no buyers for the poor quality assets, so higher quality assets are sold to raise cash.

This is why making sense of price movements in this type of market is very difficult. For example, why are some resource stocks going down, including oil and gold stocks, when the prices of the underlying commodities are generally rising?

It all adds up to uncertainty, irrationality and ultimately opportunity.

China Still Rules, OK

Irrespective of what happens in the short term, we are still of the view that we are in a secular bull market for commodities. While a correction in commodity prices would not be surprising, our strategy is to continue holding through the duration of the bull market and buy the dips.

We believe the commodity sector is still underpinned by strong supply versus demand fundamentals. Despite the US economic problems, China is still the driver of commodity demand growth.

Whilst there will be some slowing of Chinese exports as the US economy stalls, domestically driven demand for commodities, driven by things like new factories, bridges, roads, railways and buildings, continues unabated.

On top of that, the outlook for the US dollar continues to be bleak. As we’ve said many times before, falling US interest rates and the resulting falling US dollar is very bullish for commodities and precious metals in particular – witness oil this week at over US$110 a barrel and gold this week at over US$1030 an ounce.

US Interest Rates Falling, Falling, Falling…to 1%

The US Federal Reserve has made it abundantly clear it will do anything it can to prop up the ailing US economy and the banking system.

As reported on Bloomberg, US Treasury Secretary Henry Paulson said on Fox News Sunday…

“The government is prepared to do what it takes to maintain the stability of our financial system…Our focus, our number one priority, is the stability of our financial system.”

You can be sure US interest rates are set to fall even further than Tuesday’s 75 basis points cut. Ethan Harris, an economist with Lehman Brothers, was quoted in the AFR this week as saying he expects US interest rates to be cut to 1% in early 2009.

Our strategy remains the same. Maintain exposure to precious metals including gold, oil and resources in general. Continue to accumulate cash. Although the banks are heavily oversold and due for a rally, we caution against buying into the sector just yet. We believe a great buying opportunity in the banks is still some time away.

Gold At $US1030, And Set To Go Higher

Getting back to gold, you may have noticed that during the latest bout of stock market wobbles on Monday this week, gold mining stocks were bucking the downward trend. For example, Newcrest Mining added 2.6% to $38.70, Lihir Gold rose 4.6% to $4.37 and Kingsgate Consolidated gained 3.1% to $4.00.

It shouldn’t be surprising, given that on Monday, the price of gold raced to an historic peak above US$1,030.

In our very latest Report, we provided an update on gold stocks portfolio. At last count we had around 17 pure gold plays within our portfolio. Rather than cover all stocks, we focused only on some of the advanced exploration/emerging producers in our portfolio.

But first a word on gold. Not content with hitting the US$1000 an ounce mark, this week gold kept charging higher, hitting US$1030 on Monday.

We wouldn’t be surprised to see the gold price take a breather, even potentially falling back below US$1000. But bear in mind that gold's previous high of US$850 per ounce in 1980 represents at least US$2,200 per ounce in today's inflation-adjusted terms, so whilst gold's rise from US$250 lows just a few years ago may seem significant (and it is), we believe there is a lot more upside to come.

These Two Golden Stocks Look Set To Soar

As you can probably imagine, amongst the advanced exploration/emerging gold producers in our portfolio, we have what we consider to be some real hidden gems of stocks.

Hidden Gem Gold Stock #1

We have long regarded this West Australian company as a highly attractive, emerging gold play. In a sector dominated by projects with high-cost operations and flagging profitability, this company is set to be a fresh new face on the block, with strong operating margins.

Just recently the company announced that it had substantially boosted its resource base at its flagship mining location by 23% to 1.35 million ounces of gold.

We remain overwhelmingly positive on this company’s story. There are very few emerging, high-quality gold producers in the Australian market, which means that the company should undergo a significant re-rating as first stand-alone gold production approaches during the middle of 2008.

Hidden Gem Gold Stock #2

The poor share price performance of this fellow West Australian gold explorer continues to stagger us.

We have had numerous meetings with their Managing Director, and we must reiterate that in our view the company appears to be doing everything right. Yet it still is unable to generate any sort of positive share price momentum.

We think the current price weakness presents an outstanding buying opportunity for astute investors in the near-term.

The Greatest Boom In The History Of Capitalism

During these turbulent stock market times, when the good stocks are being thrown out with the bad and ugly, it pays to remain focused on the big picture and on the long-term.

We see no reason why the resources boom can’t carry on for years to come.

In last weekend’s AFR, journalist Stephen Wyatt said…

“The resources boom, the greatest boom in the history of capitalism, is alive and kicking.”

In the same article, Deutsche Bank commodity analyst Michael Lewis is quoted as saying “the supply side of commodities is likely to remain bullish”.

As we’ve said previously, we think the world is experiencing a once-in-a-century boom via China. The country is undergoing unparalleled industrialisation, with an enormous rural migration to cities. The Chinese economy is growing at an annualised rate of over 11%.

For a country with over 1.3 billion people, giving it more than 20% of the world’s population, that sort of growth is simply stunning. We think resource-rich Australia is uniquely placed to benefit from the Chinese boom.

Buying When All Others Are Selling

Uniquely placed or not, these are tough times for Australian stock market investors.

But it is worth remembering that the market usually goes down a lot faster than it goes up, yet over the market's past hundred years, two out of every three years go up.

Australian stocks have had a magnificent run over the past 5 years. Just take a look at the returns of the All Ordinaries Index…

· 2007 – UP 14%

· 2006 – UP 20%

· 2005 – UP 16%

· 2004 – UP 23%

· 2003 – UP 11%

That is a phenomenal performance. Yet hidden in those percentage returns are the daily, weekly and even monthly ups and downs of the share market.

For example, in August last year, just as the US sub-prime crisis was first emerging, the All Ordinaries Index was actually down on the year. It eventually finished up 14% for 2007.

At that point in time, it was all doom and gloom. Just as it is now.

Set-backs, corrections and pauses are part and parcel of the long-term investing game. Yet if you focus on the big picture, and constantly remind yourself that stock market investing is a marathon, not a sprint, over the long-term you should be well rewarded.

Right now, it is hard to see the bottom of the market. There will still be some fall-out from the sub-prime correction, and it’s likely we’ll see some more big names tumble.

Know Exactly Which Shares To Buy When The Market Rebounds

But if you do nothing else during these turbulent times, the least you can do is be prepared for the inevitable stock market bounce.

When the market tanks, like it has during 2008, you need to know which stocks to buy. Some share price falls will be justified, especially in the highly speculative mining penny shares sector.

But some falls will create compelling buying opportunities.

If you are prepared, you’ll know exactly which shares to buy, and at what price to buy them.

We pride ourselves on being prepared. We currently have OVER 100 different companies in our hypothetical portfolios.

Our experienced analysts also have a solid working knowledge of hundreds of other companies too. Many of the companies we follow are smaller companies, some of which have been hammered during the recent market sell-offs.

But rather than panic, we see many of the share price falls in smaller resource stocks are great buying opportunities.

Searching For Great Small Companies

We are value investors. We don’t just search for cheap companies. We search for cheap companies with excellent management, outstanding assets and sustainable competitive advantages.

We generally focus on smaller companies because they are generally over-looked and under-researched, allowing us to find companies with outstanding prospects, yet valued at a fraction of the price of larger companies.

Some of our very best recommendations have been smaller companies.

For example, each of these companies was initially recommended when they were worth less than $30 million. Just look at the stunning gains they’ve racked up since…

Carnarvon Petroleum – Up an amazing 733%* in just under 2 years!

Terramin Australia – Up a breathtaking 598%* in just a little over 2 years!

Platinum Australia – Up an astonishing 589%* also in just a little over than 2 years!

(Share prices taken on Monday 18th March 2008. Gains don’t include dividends.)

Don’t just take our word for it. Wilson Asset Management principal Geoff Wilson was recently quoted in the AFR as saying some “exceptional” opportunities have presented themselves, particularly in the mid-to-small company sector.

“I am more excited about the next 12 months than I have been in the last two or three years.”

Two Small Oil Stocks For A Rising Oil Price

Take the beaten down small oil company we told you about last week. It is a small oil production and exploration company whose share price has fallen 50% from its recent peak, leaving the whole company valued at around $75 million, of which $11 million is cash.

Today the company is forecasting profits of over $16 million in 2008, putting the company on a price to earnings ratio of just 4 times. If that’s not enough, the company themselves think their own shares might be worth around $1.55, some 384% above their current share price.

Then there’s the mid-sized oil exploration company we previously mentioned, the company about whom we recently said “…is sure to generate exploration excitement.”

The potential oil resource in place in the area they are drilling is estimated to lie somewhere between 6 million and 40 million barrels, with mean oil resources estimated at 20 million barrels.

We first recommended this exciting oil explorer as a BUY in January last year when the shares were $1.64. We re-recommended them as a BUY in January this year at around the same price, despite the company making excellent progress over the intervening 12 months.

Fast forward to today, and largely courtesy of the sub-prime fall out, the shares currently trade around the $1.20 mark. All in all, we think this company adds up to an excellent medium-high risk/high reward oil explorer.

Our Top Ten Stock Market Investing Tips

At this stage, amidst all the short-term stock market chaos and carnage, it is worth reminding readers of our top ten stock market investing tips…

1. Buy the right shares.

2. Buy the right shares at the right time.

3. Buy the right shares at the right price.

4. Invest with a long-term perspective.

5. Accept that losses are part of stock market investing.

6. Don’t panic when all about are acting like propeller heads.

7. Buy shares when others are fearful.

8. Sell shares when others are greedy.

9. Sell the right shares at the right time.

10. Sell the right shares at the right price.

Our Proprietary Stock Picking Formula

Easy hey?

In theory…yes.

In reality…no.

But that’s where we can help.

Picking the right shares is the obvious first step to making your stockmarket riches.

We have devised a proprietary stock picking formula which has served us rather well in the 7+ years of our existence.

· We search for value.

o We don’t just search for cheap companies. As we said previously, we search for cheap companies with excellent management, outstanding assets and sustainable competitive advantages.

· We identify companies that are able to out-perform.

o These are often found in smaller companies. Smaller companies are generally over-looked and under-researched, allowing us to find companies with outstanding prospects, yet valued at a fraction of the price of larger companies.

· We search out unloved companies and sectors.

o We don’t follow the crowd. When others see doom and gloom, we search for opportunities, like the smaller gold and oil companies mentioned above.

· We are investors, not traders.

o We look at the company and not the share price. Over the medium to long-term, if we identify the right companies at the right price, the share price will eventually track the underlying progress of the company, and our Members will hopefully be well rewarded.

With many experts suggesting the market is over-sold and headed for a bounce, we urge you to act now.

We wish you happy and profitable long-term investing.

P.S. One of our favourite quotes is from Christopher Davis of Davis Funds…“You want to invest in times of pessimism. Not because you like pessimism, but because you like the prices it produces. Optimism is the enemy of the rational buyer.” This is a pessimistic market. Take heed.

Follow The Bouncing Market

There is no hiding from this stock market. It is taking down the good with the bad and the ugly.

But we have some good news…

Not content with our successful predictions on oil and gold, we make two new predictions…one about interest rates and one about the stock market. The news is looking good.

Dear Despondent Stock Market Investor,

Last week, the Australian share market suffered its worst loss since December 1987, with the All Ordinaries slumping 5.4%.

Monday saw another sell off, with the All Ordinaries Index down another 1.7%. Tuesday saw no let up either.

From its record high, reached just a few short months ago on November 1^st 2007, the All Ordinaries is down 24%. In 2008 alone, it is down a whopping 19%.

At the same time as the market has been falling, Australian interest rates have been moving in the opposite direction, last week being raised to a mortgage-busting 7.25%.

Prime Minister Kevin ‘O’Seven’ Rudd recently said “Australians are paying the second-highest mortgage rates in the developed world” and “Housing is at the worst it has been in living memory.”

Yet also at the same time, oil prices reached a record high, above US$108 a barrel, and gold also recently hit a record high of US$980 an ounce.

While the stock market is generally shrouded in a veil of doom and gloom, oil and gold continue to be conspicuous bring spots. These are strange times.

What You Should Do Now

· Sell if you can’t sleep well at night. If any of your stock market investments are stressing you, push the sell button. It’s not worth risking your health.

· Hopefully you invested in the stock market with money you didn’t need to touch for at least 3-5 years, ideally longer. If that’s the case, you should be able to ride out these troubled times.

· If you’ve got the mental and financial capacity to buy more shares, buying around now is likely to turn out to be an excellent long-term investment opportunity. We’re not necessarily saying that we’re at the bottom of the market right now, but we might be relatively close. Remember – share prices will hit bottom before the economy hits bottom.

Read on for some specific investment ideas, including two beaten down oil companies we think might offer compelling value at today’s prices.

Buy Commodities, Particularly Oil and Gold

We admit the stock market news and the continued falls in share prices is all rather gloomy.

What does it all mean to you?

· Don’t over-commit yourself to the housing market.

o Make sure you can comfortably afford your mortgage repayments. The same goes if you own an investment property or properties.

· Watch your margin lending.

o For those people using margin to invest in the stock market, we’d suggest you keep a very close eye on your liquidity levels. Forced selling because of a margin call inevitably means selling at one of the worst possible times.

· Avoid financial and banking stocks.

o With deteriorating conditions in the credit markets, we have thought for a while now that banks are facing a period of underperformance, and we’ve been right. Although we’re still cautious on banks, we think they could soon be approaching reasonable value.

· Buy commodities, particularly oil and gold.

o US interest rates are set to be cut savagely again next week as the Federal Reserve attempts to prop up the ailing US economy. This will further weaken the US dollar, which in turn is excellent news for the dollar’s natural competitors, namely gold and oil. As if to emphasise the point, oil hit a record US$108 a barrel this week.

Don’t just take our word for it regarding gold. Ian Harding, principal of WaveStone Capital, was quoted in last weekend’s Australian Financial Review as saying…“Gold looks like a haven in the current market, particularly if the Chinese begin to reallocate financial reserves from US dollars to gold.”

It should be no secret to regular readers that our strategy continues to be to maintain exposure to the resources sector, looking to buy on weakness.

Take a look at these 2 beaten down oil companies, who despite their share price woes, we think are very well placed to ride the resources boom for years to come.

It is worth remembering that whilst the share prices of these have fallen, the oil price has risen from around US$80 a barrel to close to US$110. Go figure.

Beaten Down Stock #1 – A small oil production and exploration company whose share price has fallen 50% from its recent peak, leaving the whole company valued at around $65 million.

Today the company is forecasting profits of over $16 million in 2008, putting the company on a price to earnings ratio of just 4 times. If that’s not enough, the company themselves think their own shares might be worth around $1.55, some 384% above their current share price.

Beaten Down Stock #2 – The company about whom we recently told our Members that “Despite continuing to add impressively to its West Australian mineral sands position through aggressive exploration, the company has recently hit a brick will with respect to its share price.”

The shares are off 40% from their recent peak. We believe the market is missing out on a fantastic longer-term opportunity, and the company remains a core holding in our portfolio.

A Tale Of 5 Companies

Do you want further evidence that resources stocks are the place to be? Just take a look at the share price movements of these selected S&P/ASX 200 stocks for last week…

ABC Learning – down 31.3%

Centro Properties – down 31.1%

National Australia Bank – down 6.7%

BHP Billiton – down 1.8%

The Chinese Emerging Gold Explorer – up 8.4%

Can you spot the trend?

Firstly, last week was obviously a tough week for stock market investors, with the prices of many stocks falling.

The share prices of highly indebted companies like ABC Learning and Centro Properties continue to be hammered, and that’s after they’ve already plummeted heavily. There is seemingly no let up.

Secondly, in general, the share prices of resources companies are holding up reasonably well. That’s not surprising, given as the prices of many commodities continue to hit record highs.

Two More Predictions

Based on our views of the global economy, the US dollar and simple supply constraints, you already know we like gold and oil.

We like making predictions, and today we’re happy to give you two more.

A few months ago, we looked at two potential scenarios for the Australian economy and interest rates.

Under scenario one, we said interest rates might peak at 8.5% to 9% before they start falling. Courtesy of the global economic woes stemming from the US credit crunch, we now think it unlikely that interest rates will get that high.

Under scenario two, we said interest rates would peak this year at 7.25% to 7.5% and stay at that level for a further 12 odd months. We said it’s not quite the ideal scenario, but the closest we can hope to get to it. Which leads us to our first prediction…

Prediction #1 – Australian interest rates will peak this year at 7.25% to 7.5%, before starting to fall in early 2009.

The US economy is already in recession. The stock prices of many US financial, retail and home building related stocks have already been hammered. A recession is well and truly already built into their share prices. The past two US recessions lasted around 8 months. Which leads us to our second prediction…

Prediction #2 – Most US financial, retail and building US stocks are close to the bottom, with the turning point coming somewhere in April and May.

What’s so good about US stocks being close to bottoming? Simple. A rising US stock market generally results in a rising Australian stock market.

Having just made those predictions, let us put out a caveat…whilst we think we’ll be correct that Australian interest rates are close to peaking and that many US stocks are close to bottoming, our timing may be out. It’s virtually impossible to predict the short-term movements of the stock market.

Longer-term stock market predictions are easy. The market will go up. We just don’t know exactly when it will start going up again.

But what we do know is that history has shown when the bounce comes, it will be swift. We also know that many experienced, successful investors, especially in the US, are already fully invested in high quality companies that are trading at very cheap prices.

What Goes Down Fast Goes Up Even Faster

For example, in its most recent quarterly investment letter, Canadian-based Trapeze Asset Management, a small money manager with a strong value investment philosophy and an excellent track record said…

“…invariably, after a poor performance period, rooted in an overall market decline, our best upside performance has followed. We are in the right groups. Overweighted in Energy (with oil at a record high over $100 and natural gas at two year highs), and Golds (with gold at record highs), some other resource plays (with their commodities strong too), a cheap defense stock and some cheap, beaten up retailers.”

“Many are smaller caps and went down much more than the market as investors avoided those kinds of stocks. We think those stocks will rise more quickly in the market recovery.”

“History is on our side too. Market declines tend to be brief in duration and volatility is greater on the following upside than on the decline with the rebound typically very substantial in the first three to four months after the bottom.”

Getting Out Of The Stock Market For Life

If you are a stock market investor, your portfolio would no doubt have taken somewhat of a hammering. Few shares and few sectors have been spared – big companies, small companies, banks, insurance companies, property companies and even some oil and gold companies have all taken a hit.

It hurts to look at your portfolio day after day, seeing a lot of hard fought gains being wiped out in a matter of days and weeks. It could turn you off the stock market for life.

Take this email we received recently from a friend of ours …

“I don’t think I will EVER buy any more stocks. I invested $3000 and they are now worth just over a grand, what a joke. I am hoping they will climb up to around $1,500 and I am going to sell then, losing 50%, and get out for life.”

Our friend is hurting. But unfortunately we predict the hurt won’t end here for our friend.

He has clearly made many mistakes …

Mistake #1 – Investing in shares in the first place

Our friend shouldn’t have bought shares in the first place. If you are not prepared to invest for a period of 3-5 years, and to ride out the inevitable ups and downs, you shouldn’t be investing in the stock market at all. Period.

Mistake #2 – Thinking of making quick and easy profits

Our friend was persuaded to invest in the stock market because he saw other people making “easy” money in tiny resource companies, and thought he’d give it a try too.

Worse, he invested in his mate’s “hot tip”, without knowing a single thing about the company he was investing in, especially the risks.

Worse still, he put all his eggs in one basket – a tiny oil explorer hoping to hit it big in a politically unstable area of central Africa. In this unforgiving market, the 67% loss on his originally investment has been somewhat predictable.

Mistake #3 – Hoping to get out with just a 50% loss

When our friend says he is hoping to sell out when his current $1,000 investment gets to $1,500, he doesn’t quite realise he is probably about to compound his original mistake.

He should be forgetting what he paid for the shares, because that is irrelevant now. If he thinks the shares will rise 50% from here, taking his $1,000 to $1,500, surely he should be buying more shares now.

But he’s not thinking like that. He’s fixed on taking a 50% hit on his initial investment and with that, getting out of the stock market for life.

We’d respectfully suggest the chances are that his speculative central African oil explorer will fall by another 50% or more rather than rise 50% from today’s price. Our friend should sell out completely now.

Mistake #4 – Buying at the top and selling at the bottom

It’s the classic small private investor error. Inexperienced investors are often sucked into buying when prices are high, afraid of missing out on future profits. Conversely, they sell when the share price is at a low point, just wanting to get out to avoid any further pain.

For what you should be doing now, read on…

Mistake #5 – Getting out of the stock market for life

Stock market investing is a great way to build long-term wealth. To give up on it because of one or two bad experiences is a mistake. Instead, a better course of action would be to learn from your mistakes, change strategy, and vow to conquer the stock market.

If you need pointing in the right direction, completely independent analysts may be able to help get you on the right track.

Oops – There Goes The House Money

The stock market blues are catching.

Here’s another email we received this week, one we suspect many people might sympathise with.

It came from an Auntie of one of us here, a 71 year old widow who recently sold her house to move into a smaller rental property, trusting a large portion of her house sale proceeds to a financial advisor to invest in the stock market on her behalf.

“The stock market news is very depressing. I have lost faith with the financial advisor crowd I went with. They blame the US sub prime market of course, but then again they put me in Allco, ABC and Centro for starters!! I am going to question their fee structure in the light of my losses. I know I am moaning like everybody, but I am lucky to be well and off on a great break.”

We suspect she is not the only person questioning the expertise of her financial advisors, people she pays handsomely for their services. Annual management fees of between 1% and 2% are commonplace, meaning for a portfolio of $800,000, annual fees could be between $8,000 and $16,000. Thanks for nothing!

Everyone makes mistakes, and in this market, mistakes are magnified. But we’d question how so-called ‘expert’ highly paid financial advisors could invest this lady’s money into not one, but three very highly indebted companies, all of whom have seen their shares lose over 80% in value from their peak.

Swimming Naked

As far as the financial advisors are concerned, we put it down to…

1. Complacency.

2. Laziness.

3. Greed.

The 5 year bull share market has bred a culture of complacency, laziness and greed. A rising tide has lifted all boats. The strategy of buying on the dips has served investors and financial advisors very well.

But the tide has now gone out, exposing some naked swimmers, like our Auntie’s financial advisors. Unfortunately it is her who pays the ultimate penalty and not the financial advisor. If you think the whole fee structure of many financial advisors – where they get paid a percentage of assets, regardless of the performance of the investments – is flawed, so do we. But that’s a story for another day.

What should our Auntie do? We suggest she tries for a complete refund of her fees, she withdraws her money immediately from her current financial advisor, and puts all her money in a low cost indexed Exchange Traded Fund, like the one that replicates the performance of the top 200 Australian Shares.

What The Very Best Investors Do In Times Like These

What do you do during these times of periodic stock market wobbles?

We don’t blame you if you sit on the sidelines, waiting out the storm.

But what really sets the best investors apart from the average investors is their ability to calmly and rationally assess the situation, to concentrate on the underlying value of the company and not its falling share price, and to take advantage of the falling share market to buy some more of their favourite shares at even cheaper prices.

The Shares To Buy When The Market Tanks

One of the keys to successful investing is being prepared.

When the market tanks, like it has during 2008, you need to know which stocks to buy. Some share price falls will be justified, especially in the highly speculative mining penny shares sector.

But some falls will create compelling buying opportunities.

If you are prepared, you’ll know exactly which shares to buy, and at what price to buy them.

We wish you happy and profitable investing.

P.S. Remember the gold explorer we told you about a couple of weeks ago who we believe will have eventual global gold resource in the vicinity of 3-5 million ounces? The share price has fallen over 10% in the last 2 weeks alone, despite the gold price threatening to break the US$1000 an ounce mark. It may not be this cheap for much longer.

P.P.S. The latest Trapeze Asset Management investment letter also said… “There is considerable evidence that the (North American) market has already bottomed, so we need to be ‘in the game’, owning good businesses when they are as cheap as they’ve gotten. This is a time of opportunity, not a time to be feared.” As they say in Scouts, Be Prepared.

Interest Rates Up, Gold & Oil Up More

Just as we said they would, banks and retailers continue to be hammered by the stock market, with more pain to come courtesy of the latest interest rate hike.

The good news for mining stocks just keeps coming, with yet more record highs for gold, oil and platinum.

As gold approaches US$1000 an ounce, we remind readers of one of our very favourite gold miners, up 250% from its August 2007 lows, but with potentially much further to run.

Dear Wounded Stock Market Investor,

The stock market keeps getting pounded. Every time the market rises, it subsequently gets knocked back down again.

We’ve written here several times before about how psychologists tell us that the pain of loss is three times the joy of gain.

This market is painful, painful, painful.

We’ve also written here several times about how human psychology plays an important part in stock market investing.

For example…

· Do you find yourself euphoric when share prices rise yet despondent when the fall?

· Do you find yourself wanting to buy shares when the overall market is rising, and sell them when the overall market is falling?

· Have you managed to buy shares at their peak, and sell shares at their low point?

· Have the 2008 falls put you off stock market investing for the time being, or maybe even for years?

In the short-term, and by short-term, we mean daily, weekly and even annual movements, the direction of individual stocks is driven by greed and fear.

The really successful stock market investors are able to control their emotions. In Warren Buffett’s words, they are fearful when others are greedy and greedy when others are fearful.

Rabbits, Foxes And The Stock Market

They cheer a falling market, realising it gives them the opportunity to buy shares at cheaper prices. Instead of acting like rabbits frozen in the headlights of a falling market, they act like foxes locked in a hen house, spoilt for choice.

Are you a rabbit or a fox?

If you are a rabbit, read on. We think we may have some better stock market food for you than banks and retailers.

If you are a fox, good for you, but we also suggest you read on. As you will know, the key to stock market investing success is to buy the right shares at the right price. We think we’ve got some good tucker for you, including…

· The gold miner with the goal to produce 1 million ounces of gold per annum and have reserves of 10 million ounces by the end of 2010.

· Why we hope you’ve avoided the banking sector, and why we think you should continue to avoid it.

· How the gold price once again hit a record high this week, and how we think gold’s biggest moves may be still in the year’s ahead.

No Sympathy Here For Company Directors And Their Huge Margin Calls

But first, in the wake of the ABC Learning Centres melt-down, and the margin calls that forced several directors including CEO Eddy Groves to sell shares, we couldn’t help but pile in and give our $45 million worth.

We’re struggling to understand why company directors use margin to buy even more shares in the companies they run.

Here are a few guesses…

· They want to impress their friends, family and the other parents at their kid’s exclusive private school.

· They want to show potential investors how confident they are about the future prospects of the company they run by buying millions of dollars of shares with their “own” money, hoping it will ultimately result in a higher share price than it otherwise would have been.

· They crave a controlling interest in the company they work for. On that same point, once a company is listed on the stock market, founder/owners no longer own the company. They work for the company. Some directors seem to conveniently forget that important distinction.

· They are greedy.

No Ferraris Here

Directors generally receive huge salaries. They generally already own a substantial number of shares in the companies they work for, often worth millions of dollars. They generally have generously priced stock options in the companies they work for, often potentially worth even more millions of dollars.

It seems to us as if most company directors should already be sufficiently incentivised and motivated by their existing salary and share holdings without having to resort to borrowing large amounts of money to buy yet more shares in the companies they work for.

When the margin calls are a coming, we find it a little difficult to have much if any sympathy for directors who are forced to sell at bargain-basement prices.

End of story.

Takeover Fever Is Here, Coming Soon To A Resources Company Near You

The BHP Billiton takeover bid for Rio Tinto is old hat now. Without getting into too much detail, BHP’s bid largely revolves around 3 things…

1. The resources boom lasting for decades to come, including it being cheaper for BHP to acquire existing mines than it would be for them to find new resources.

2. Giving the combined BHP/Rio increased pricing power, especially in the red-hot iron ore market.

3. Cost-cutting.

BHP expects all three will ultimately result in increased shareholder returns. We’ll find out in the years ahead.

Zinifex Becomes “Oxifex” – Are These 2 Takeover Plays Set To Soar?

This week Oxiana agreed to buy Zinifex for around $6 billion.

The combined “Oxifex” would create a company which would rank as the world's second-largest zinc miner and which would have sizeable production of copper, lead, gold and silver. “Oxifex” would also be Australia’s 3^rd largest diversified mining company after BHP and Rio, meaning it could soon be the 2^nd largest diversified miner should BHP eventually takeover Rio.

Why would Oxiana buy Zinifex? See reasons 1, 2 and 3 above.

It’s a recurring theme. But it’s not surprising. With commodity prices regularly hitting record highs, continued insatiable demand from China and increased mining and production costs, and the opportunity to rationalise cost bases, companies are finding it cheaper to buy than to find.

What is surprising however is how few takeovers we’ve currently seen in the mid-range mining and resources sectors. But we think that is all about to change, with several of our portfolio companies looking likely targets…

Takeover Play #1 – South African Platinum

The platinum price continues to hit all time highs, up an amazing 47% this year alone. Yet the shares of the South African platinum explorer we think is a potential takeover target still trade around the same level they were at the end of December.

In our most recent review of the company, we concluded saying it “…continues to represent a rare, high quality investment opportunity for Members. It boasts two extremely attractive emerging South African platinum projects at a time of record prices. This is sure to sustain investor interest…which could result in a takeover or merger at some stage in the future.”

Takeover Play #2 – Northern Territory Iron Ore

We recently met with this company’s Chairman and Chief Executive, giving us the opportunity to get even closer to one of our favourite mining companies.

Today the company is an iron ore producer in the Northern Territory, with production continuing to exceed budgeted levels.

Tomorrow, the board is actively looking to diversify the company's production and earnings base away from purely iron ore to become a fully diversified carbon steel and other commodity company. They already have made investments in other smaller companies.

Although the directors naturally weren’t giving anything away, it seems the company will soon be looking to acquire smaller, undervalued emerging producers. Giving us a great deal of confidence in this strategy is the Chairman’s experience with a similar business model whilst at the helm of another mid-range diversified miner.

In our most recent BUY report we said …

“…(the company) has current production that allows it to take full advantage of the window of opportunity in iron ore that presents itself right now, and secondly, it is looking to build other income streams to reduce its exposure to iron ore alone. This is visionary stuff and what company building is all about.”

We concluded by saying the company “…continues to represent what we consider to be an outstanding resource play…we recommend the stock as a Buy around $1.19*.”

The good news for potential buyers of this very promising company is that today the shares trade back around the $1.02* level, down 14%* on our most recent buy price and down a whopping 41%* from its all time high reached as recently as November 2007.

Are you a fox or rabbit?

The Problem With Banks And Retailers

There is a real Aussie fascination with banking and retail stocks. But in recent times, it has turnout to be an expensive fascination.

As reported on Bloomberg this week, a note by ABN Amro said headwinds in the banking sector have turned “gale force” for the industry. The note also said “We expect a cyclical increase in bad debt in financial 2009-10 given further interest rate increases and the Reserve Bank of Australia's intent to slow the economy.”

On Monday this week, Commonwealth Bank shares fell to their lowest price since November 2005 and National Australia Bank sunk to their lowest since October 2004.

Why the fascination with banks and retailers? We guess it’s because…

1. The companies are well known to all of us, as we regularly see their names at shopping centres. Compare the brand recognition of Westpac and Harvey Norman to one of our biggest ever share price winners, oil explorer Carnarvon Petroleum.

2. Over the past 15 odd years, shareholders of banks especially, and some retailers, have enjoyed spectacular long-term investment returns. If you bought $10,000 worth of Commonwealth Bank shares at their float back in 1991, even after the shares have fallen around 33% from their recent peak, your $10,000 would now be worth almost $75,000 and that’s not including dividends.

3. Banking sector investors have done well in the past by buying shares on the dips. It has been a good strategy – in the past. Things are different now.

Interest Rates, Houses Unaffordable…A Bad Recipe For Banks

Today we have…

· Interest rates at a 12 year high, potentially set to go even higher.

· Inflation continues to run above the benchmark set by the Reserve Bank of Australia.

· Courtesy of the credit squeeze, bank profit margins are falling.

· As interest rates rise and some high profile highly indebted businesses struggle to survive, bad debts also rise, putting yet more pressure on banking profits.

· Finally, with Australian house prices the most unaffordable in the world, the spectre of falling house prices looms large on the horizon of banking profits.

As regular readers will know, we have long advised caution on banks.

The Good News From The Bank’s Share Price Woes

Repeat after us…

What’s bad for financials is good for gold.

What’s bad for financials is good for gold.

What’s bad for financials is good for gold.

Got it?

This week, yet again, gold reached an all-time high, hitting over US$985. The gold price is now up more than 17% in 2008 alone.

We’ve been saying it for a long time now, and now many others are finally cottoning on too…the gold price is headed for US$1000 an ounce.

With the gold price moving so quickly, by the time you read this it may already have breached the psychologically important US$1000 an ounce mark. Even if it hasn’t, we think it’s surely only a matter of time before it does.

We Are Targeting A Gold Price Of US$1100 In 2008

As we’ve been saying for a long time now, the long-term fundamentals for gold are still very strong.

Gold is a currency, not a commodity.

Because of gold's unique qualities, for thousands of years it has been used as a store of wealth and a medium of exchange. Because of its inability to be freely created (unlike government controlled money) gold has always been the anchor of financial systems, providing stability and trust.

With stability and trust in the world's monetary system evaporating rapidly, and US interest rates set to fall further as the world’s biggest economy edges inexorably closer to recession, gold is set to continue to be a major beneficiary.

In fact, we think gold's biggest moves may still be in the years ahead.

When adjusted for inflation, gold remains well below its all-time high. An ounce of gold at US$875 in 1980 would be worth around US$2,200 today, or US$5,000 an ounce if more traditional measures of inflation were used.

The Bull Market Has A Long Way To Go – So Vote For Gold

As we said in an article we recently were asked to write for the Sydney Morning Herald and The Age…

“…the bull market in gold has a long way to go. The only event that would change our mind would be if US officialdom conceded that ultra low interest rates were not a panacea for all the world's economic ills. But in reality, this is unlikely to happen. As George Bernard Shaw said:

‘You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold’.”

Given that background, it’s no hard to see why we’ve lifted our target price for gold for 2008 to US$1100 an ounce.

The Emerging Gold Producer With Huge Potential

Regular readers of this email may recall us previously highlighting a West Australian emerging gold producer with significant exploration potential as a company whose prospects we thought were very promising.

As a reminder…

· By the December quarter of 2008, the company anticipates producing gold at an annual rate of 450,000 ounces. At current gold prices, that translates into annual revenue of around $470 million.

· Their gold resources are already a staggering 8.4 million ounces.

· Further exploration potential comes via a study identifying geological targets in Australia with the potential to host 1 million ounce or larger gold deposits. A tenement application for almost 1000 square kilometres covering a number of their identified targets has been lodged in South Australia.

This Small Gold Miner Is Aiming For 10 Million Ounces

Then at the end of October last year, the company announced details of a $100 million capital raising to fund completion of their current mining projects, the continuing expansion at another mine, acceleration of exploration, and working capital.

We first highlighted this company to readers of this email back in August last year when the share price was considerably below the 60 cents* level at which we had first recommended our Members buy the shares.

People who signed up to become a Member, found out the name of this emerging West Australian gold producer, and bought the shares at around the 50 cents* level they traded at in late August and early September 2007 would already be sitting on 88%* profit.

Whilst that is impressive, the share price hit as low as 37 cents* during the August 2007 sub-prime sell-off and since then, has increased by around 250%* in less than 6 months!

The company’s corporate goal is…

· “To produce 1 million ounces of gold per annum and have reserves of 10 million ounces by the end of 2010”

With the gold price hovering around the US$985 or A$1045 an ounce mark, and the company valued today at around A$950 million, it doesn’t take a rocket scientist (although it does take a calculator with a lot of digits) to work out the potential upside for this company.

As Gold Heads Towards US$1000, This Emerging Gold Producer Represents An Attractive Investment Opportunity

This Western Australian gold mining company is one of our very favourite companies, even after it has run from a low of 37 cents* to the around 94 cents* level at which it trades today.

In a special email alert update we sent to our Members just before Christmas, we highlighted the company as a BUY, saying…

“…investors are still not convinced of gold’s merits and in times of market volatility, gold stocks are still getting hammered. Although unsettling, we are not overly concerned by this. Given the pullback we have seen in the gold sector, for those looking to add or build exposure, we recommend...(the company at) around 67 cents*.”

With the shares now trading at around 94 cents, that buy advice is currently looking quite timely, the stock being up around 40%* in just a few short weeks.

We continue to believe this company represents an attractive investment opportunity, especially considering the continued strength in the gold price, and our long-term prediction of US$1100 an ounce.

We wish you happy and profitable investing.

P.S. As reported on Bloomberg this week, commodity exports from Australia are forecast to gain for a fifth straight year, driven by demand for steelmaking raw materials led by China. The Australian Bureau of Agricultural and Resource Economics said robust economic growth is expected in China this year along with strong demand for Australia's resources. Peter Arden, an analyst at Ord Minnett commented that “China is far and away the biggest underlying force” and that “The outlook is very, very rosy.”

P.P.S. Just last week we recommended Members BUY this large and growing gold miner, saying “2008 looks set to be a bumper year for the company”. Little did we know at the time, but just 2 days later, the company announced a major upgrade to its flagship mine, lifting gold production capacity to around 1 million ounces per year from 2011, giving us even more confidence and comfort with the company’s story.