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Where are the hot and cold spots around the world for resource investors? The stampeding bull market in commodities has investors reaching for new ideas. Highly respected newsletter writer Lawrence Roulston of Resource Opportunities favors Canada, Alaska and China for investing in mining and energy companies.
StockInterview: Lets get the cold spots out of the way so investors are forewarned about which countries to avoid.
Lawrence Roulston:
A lot of the (mining) companies that went overseas in decades back are recognizing the political difficulties with dealing in some jurisdictions. These include places like Indonesia, Columbia, and several of the African countries, such as Congo, Sudan and Eritrea. All of those places where there are great geological prospects, but are more and more risky to deal in. I think some of that mining is coming back closer to home, which is right here in Canada.
StockInterview: So Canada is on your favorite countries list?
Lawrence Roulston:
At the very top of the list would be Canada. As of right now, taking into account the geological potential, political situation, infrastructure and all the other issues, I would (highly) rate Canada and British Columbia. They have had decades of work. But for the last decade, there hasnt been very much going on. The companies are just coming back and picking up with whats been going on. Similarly, Ontario, Quebec tremendous geological potential and its been kind of ignored for a long time. Canada is now the most important place in the world for diamonds, representing 50 percent on exploration spending for diamonds.
StockInterview: Is there a specific mineral or metal that makes Canada especially appealing?
Lawrence Roulston:
Its the whole gambit. Canada has always been one of the top metal producers, and its coming back to life. Of course, gold is at the top of the list, but also base metals and uranium. The Athabasca Basin in northern Saskatchewan is far and away the most important area to be looking at, geologically. Its currently the biggest source of uranium and contains the highest grade deposit. There are other uranium prospective areas in Canada that are just emerging. The Thelon Basin in the Northwest Territories, north of the Athabasca Basin, is very similar, geologically, to the Athabasca Basin. It had some work done in the 1970s, and its been pretty much ignored until very recently. Going a little further north to Hornby Basin, it is a similar kind of situation. In Labrador, the central mineral belt is just emerging as a very important place to be looking for uranium.
StockInterview: Do you have any favorite companies, which you are following and which have good prospects?
Lawrence Roulston:
NovaGold Resources (TSX: NG; Amex: NG), for example, with the Galore Creek. Its a billion ton deposit with enormous metal content. (Editors Note: Galore Creek has been called one of the largest and highest grade undeveloped porphyry-related gold-silver-copper deposits in North America.)
StockInterview: What is another of your favorite areas, which has gone largely undetected during this bull market?
Lawrence Roulston:
Nevada would be at the top of the list of anywhere in the world to be working and Alaska right behind it. There is huge potential in Alaska. Mining companies have only scratched the surface of exploration up there. Two of the largest metal deposits in the world are in Alaska. These are both discoveries going back decades, but work over the last couple of years has brought them to the point where theyre now recognized as among the largest metal deposits in the world: Donlin Creek, a 25-plus million ounce gold deposit, and the Pebble deposit, held by Northern Dynasty (TSX: NDM). The Pebble deposit is significantly larger than, and of comparable grade to, Ivanhoes (NYSE: IVN) Oyu Tolgoi (copper-gold) deposit in Mongolia. (Editors Note: The Donlin Creek project is a joint venture between NovaGold and Barrick Gold.)
StockInterview: Anywhere else in the world where you can find a great, but still new resource investment opportunity, in light of how hard the commodities bull has been stampeding the past few years?
Lawrence Roulston:
Often the better value to be had, or the better opportunity, is in being a little bit out of step with the crowd. One of the areas offering some outstanding opportunities is China.
China has done a tremendous amount of geological work, over the last few decades, but all from the perspective of finding, and then quickly developing, small deposits. There has been very little effort devoted to taking a bigger picture type look at China. The companies that have been able to take a kind of bigger picture look at China have begun to develop what I think are going to be some pretty spectacular results over time.
StockInterview: Isnt it tough, though, doing business in China?
Lawrence Roulston:
There is still a perception out there that China is a difficult place to do business. Most people from the west walk into China cold and try to do a deal. It would be impossible for them. But, for western companies that are able to team up with groups that are well established within China so that theyre able to find their way through the system over there then there are outstanding opportunities. There are mountains of geological information all in Chinese, of course. Youve got to be able to work within that system and get the information, know how to put the deals together.
StockInterview: What do you mean by knowing how to put the deals together?
Lawrence Roulston:
If I was to go over to China and try to do a deal to get access to a coalbed methane property, I wouldnt have a clue about how to begin. On the other hand, I could walk into the Petroleum Club in Calgary, and meet a half dozen guys and talk to them. I could build on my leads, and probably in a day be talking about a deal. When you go into China, unless you have somebody on your team that can get into the system and deal with the people, because of language issues, cultural issues and just having access to the information and knowing what sort of terms that they might be looking for Its a different culture from every perspective, and not the least of which is a different way of doing business.
StockInterview: In your April issue, you recommended one company, which overcame those hurdles, meets your criteria and already has a coalbed methane deal in China.
Lawrence Roulston:
Pacific Asia China Energy (TSX: PCE) established connections in China. They can draw on their contacts and their network. They can get into see the right people, where they can actually talk seriously about doing deals, and have an enormous leg up over somebody that walked in cold and tried to establish and build contacts and put a deal together. I think it is an absolutely outstanding opportunity that theyve seized on.
StockInterview: There are many coalbed methane opportunities in Alberta. Why look to China?
Lawrence Roulston:
One of the things that makes China interesting is the entry cost to get into a coalbed methane (CBM) play in China is fairly modest. For example, to go to Alberta, or anywhere in the United States, and get access to the exploration rights, or exploitation rights, is enormously expensive. In China, they walked in and, for a fairly modest up-front commitment, obtained a control position in a CBM prospect.
StockInterview: How does Pacific Asia China Energys coalbed methane property in Guizhou, China rate against other coalbed methane plays?
Lawrence Roulston:
I think its an outstanding opportunity. Chinese government agencies have done an enormous amount of work at delineating the coal. To be able to step into that amount of data as a starting point to build up their CBM resource? The bottom line is that theyre not out there looking for coal. They know exactly where the material is, and theyre able to quickly start defining the issues like recoverability. Theyre drilling in order to establish the basic physical parameters of the flow rates and the content within the coal. I think the companies which are able to effectively exploit the CBM technology in China are going to be the pioneers in that area.
StockInterview: To Americans, any business in China might appear to be pioneering, since most of still think of China as a third world country.
Lawrence Roulston:
Ive been to China many times and Ive been to parts of China where most people, as tourists, would never get anywhere near, because I go there to look at mineral exploration projects and mining projects. Ive been to every corner of the country as well as the major cities. What I see happening everywhere I go is a pace of development that Ive never seen anywhere else in my life, anywhere in the world. That is, 1.3 billion people are going from a basically rural farm-based economy to a modern industrial economy at a pace that has just never before been conceived.
StockInterview: How do you quantify that?
Lawrence Roulston:
This is a number that most people wont get, and you wont get until youve been over there and have seen it. There are 300 million people in China that are already well into the middle class. By middle class, I am comparing (the Chinese middle class) to the same absolute standards as we would apply in Canada or the United States in terms of pounds in your bank account, value of your house and your car, and everything else. There are 300 million people that have already achieved that status, which is more than the people at that status in North America. There are another 1 billion people who are busting their butts to get to that level.
StockInterview: But isnt the rest of the worlds rural population just as industrious and ambitious?
Lawrence Roulston:
Ive been in Africa, the Middle East, Asia and Latin America. If you go into any of those areas and you walk into the small towns, a lot of people are sitting around drinking coffee, crying the blues and complaining about how terrible life is. Go into a similar area in China, and the people are out working in the fields. In the middle of winter, theyre fixing up their fences, the dams and terraces, and clearing rocks, removing trees and stuff like that. Its a high level of industry Ive never seen in any other part of the world. So it goes from that ground level right up to the entrepreneurs, and the guys who are building the high rise condominium complexes in Shanghai.
StockInterview: How long will it take before American investors realize the impact China has on the global economy?
Lawrence Roulston:
Its going to happen in a gradual way. I think those that keep their heads buried in the sand are going to get left behind as the world pulls ahead. I would suggest any investor in any company ask the question of the company: Is that company involved in some way in China? There are a lot of North American companies that have a very significant presence in China in terms of doing business over there, of getting established, of selling products or manufacturing products in China.
StockInterview: Why is China so important with regards to this commodities bull market, and are there still opportunities for investors?
Lawrence Roulston:
There is a lot of geological potential, and there is the perception that its difficult. Therefore, there isnt yet a big crowd of people over there chasing after deals. The flip side of it is that China and its neighbors in southeast Asia, representing 3 billion people, are going through the modern industrialization process. That is going to continue to create a massive demand for metals for, I believe, a decade or probably even a couple of decades into the future.
StockInterview: And most likely, the U.S. investor is going to be left behind or the last one into the pond?
Lawrence Roulston:
The bottom line is that Americans tend to be more inward focused. The other evening I was having dinner with an oil man from Texas who had spent a lot of time in China. He had seen China first hand and was very bullish. I asked him, How many of your countrymen do you think really get it about China? And he responded, Oh, about five. Then he said, Congress doesnt get it, investors dont get it and the man in the street doesnt get it. Americans just dont understand whats happening over there yet.
In this day and age, a lot of things have changed from how they used to be, which can be new and exciting for most.
Because of the large size of the stock market, beginner investors appear to feel overwhelmed as to where to even activate investing their money. To most people, the stock market presents a messy web of options but does not reveal the highway map of clarity to guide their way along way in their investment adventure. The key to investing in the stock market is to become as educated as it is possible so that you know exactly what is taking place at all times. This helps people to make plausible and sound decisions about their money, thus, dropping the stress involved with investing.
The usual person, when beginning to entertain the idea of investing in the stock market, falls into one of two categories. Class one is the gambler who feels that investing is definitely a form of betting and no question what they do, they are certain that they will drop money slightly than make money. It seems that this opinion of investing in stocks is either formed from friends and family that have been baffled by the stock market or private experience and lost money. If someone has personally made losses in the stock market, it is pretty evident that they were not educated enough at the time of their investment in the stock market. Therefore, they must become educated as to what exactly the stock market is as well as how its system works in order to become a successful investor. Class two, on the other hand, represents the go-getter investor, which is an individual who knows that they should invest into the stock market for the safety of their monetary future, but they have absolutely no idea where to begin. The go-getters lean towards avoiding their monetary decisions and leave it up to professionals; therefore, they are powerless to justify why they own a certain stock. A usual go-getter operates in blind faith, as one stock goes up in value, they more than likely will hold it. The go-getter is in poorer shape than the gambler in that they will invest like everyone else and then wonder why they receive an unsatisfactory or devastating outcome. This just proves that the typical person should become thoroughly educated about the stock market as well as stocks before investment takes place.
Essential to every economy is business…businesses that started out as small operations that have grown to become money making giants, raising capital by promoting stock in them to people who want to invest to make their futures financially secure. As small businesses start to grow, one of the supreme obstacles is generating enough money in order to develop into a superior operation. Businesses either scrounge the money in the form of a offer from a bank or venture capitalist, or someone that will invest money into a business in which they feel they will receive a high rate of return, or a reap from their investment into a business, in order to create the currency to expand. The most common choice for a business to gain money for the view of expansion is to take out a loan; however, there is no agreement that a bank will offer money to any given business.
What we have explored up to now is the most important information you need to know. Now, lets dig a little deeper.
In this case, business owners roam to the stock market for help in the form of issuing stocks. Firm owners relinquish a tiny fraction of control over their business and in reciprocation; the stock market provides that business money that does not have to be salaried back, in order to guarantee expansion. As an added bonus, the business is permitted to go public, a saying that means a brand is selling stocks for itself for the first time, so that business owners no longer are required to borrow money from banks because they can merely use their own stocks for getting monies to use for expansion. Thus, as the business grows and sells their stocks to people, the better chance a sponsor has on gaining a return on their investment as opposed to a loss.
As an investor, it is to your advantage to efficiently study each and every business in which you propose to hold stocks. The more facts you know about any certain business, the easier it is to make a plausible decision as to whether you should hold stocks or want a different business in which to work with.
Try searching for a particular keyword from the title of this article on your search engine and you are sure to find a wealth of knowledge.
If you have heard fund managers talk about the way they invest, you know a great many employ a top down approach. First, they decide how much of their portfolio to allocate to stocks and how much to allocate to bonds. At this point, they may also decide upon the relative mix of foreign and domestic securities. Next, they decide upon the industries to invest in. It is not until all these decisions have been made that they actually get down to analyzing any particular securities. If you think logically about this approach for but a moment, you will recognize how truly foolish it is.
A stocks earnings yield is the inverse of its PE ratio. So, a stock with a PE ratio of 25 has an earnings yield of 4%, while a stock with a PE ratio of 8 has an earnings yield of 12.5%. In this way, a low PE stock is comparable to a high yield bond.
Now, if these low PE stocks had very unstable earnings or carried a great deal of debt, the spread between the long bond yield and the earnings yield of these stocks might be justified. However, many low PE stocks actually have more stable earnings than their high multiple kin. Some do employ a great deal of debt. Still, within recent memory, one could find a stock with an earnings yield of 8 12%, a dividend yield of 3- 5%, and literally no debt, despite some of the lowest bond yields in half a century. This situation could only come about if investors shopped for their bonds without also considering stocks. This makes about as much sense as shopping for a van without also considering a car or truck.
All investments are ultimately cash to cash operations. As such, they should be judged by a single measure: the discounted value of their future cash flows. For this reason, a top down approach to investing is nonsensical. Starting your search by first deciding upon the form of security or the industry is like a general manager deciding upon a left handed or right handed pitcher before evaluating each individual player. In both cases, the choice is not merely hasty; its false. Even if pitching left handed is inherently more effective, the general manager is not comparing apples and oranges; hes comparing pitchers. Whatever inherent advantage or disadvantage exists in a pitchers handedness can be reduced to an ultimate value (e.g., run value). For this reason, a pitchers handedness is merely one factor (among many) to be considered, not a binding choice to be made. The same is true of the form of security. It is neither more necessary nor more logical for an investor to prefer all bonds over all stocks (or all retailers over all banks) than it is for a general manager to prefer all lefties over all righties. You neednt determine whether stocks or bonds are attractive; you need only determine whether a particular stock or bond is attractive. Likewise, you neednt determine whether the market is undervalued or overvalued; you need only determine that a particular stock is undervalued. If youre convinced it is, buy it the market be damned!
Clearly, the most prudent approach to investing is to evaluate each individual security in relation to all others, and only to consider the form of security insofar as it affects each individual evaluation. A top down approach to investing is an unnecessary hindrance. Some very smart investors have imposed it upon themselves and overcome it; but, there is no need for you to do the same.
Investing in penny stocks provides traders with the opportunity to dramatically increase their profits, however, it also provides an equal opportunity to lose your trading capital quickly. These 5 tips will help you lower the risk of one of the riskiest investment vehicles.
1.Penny Stocks are a penny for a reason.
While we all dream about investing in the next Microsoft or the next Home Depot, the truth is, the odds of you finding that once in a decade success story are slim. These companies are either starting out and purchased a shell company because it was cheaper than an IPO, or they simply do not have a business plan compelling enough to justify investment banker’s money for an IPO. This doesn’t make them a bad investment, but it should make you be realistic about the kind of company that you are investing in.
2.Trading Volumes
Look for a consistent high volume of shares being traded. Looking at the average volume can be misleading. If ABC trades 1 million shares today, and doesn’t trade for the rest of the week, the daily average will appear to be 200 000 shares. In order to get in and out at an acceptable rate of return, you need consistent volume. Also look at the number of trades per day. Is it 1 insider selling or buying? Liquidity should be the first thing to look at. If there is no volume, you will end up holding “dead money”, where the only way of selling shares is to dump at the bid, which will put more selling pressure, resulting in an even lower sell price.
3.Does the company know how to make a profit?
While its not unusual to see a start up company run at a loss, its important to look at why they are losing money. Is it manageable? Will they have to seek further financing (resulting in dilution of your shares) or will they have to seek a joint partnership that favors the other company?
If your company knows how to make a profit, the company can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, but when you do, you lower the risk of a loss of your capital, and increase the odds of a much higher return.
4.Have an entry and exit plan – and stick to it.
Penny stocks are volitile. They will quickly move up, and move down just as quickly. Remember, if you buy a stock at 0.10 and sell it at 0.12, that represents a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a daily basis. If your investment capital is 10 000, a 20% loss is a 2000 loss. Do this 5 times and you’re out of money. Keep your stops close. If you get stopped out, move on to the next opportunity. The market is telling you something, and whether you want to admit it or not, its usually best to listen.
If your plan was to sell at 0.12 and it jumps to 0.13, either take the 30% gain, or better still, place your stop at 0.12. Lock in your profits while not capping the upside potential.
5.How did you find out about the stock?
Most people find out about penny stocks through a mailing list. There are many excellent penny stock newsletters, however, there are just as many who are pumping and dumping. They, along with insiders, will load up on shares, then begin to pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here.
Not all newsletters are bad. Having worked in the industry for the last 8 years, I have seen my share of unscrupulous companies and promoters. Some are paid in shares, sometimes in restricted shares (an agreement whereby the shares cannot be sold for a predetermined period of time), others in cash.
How to spot the good companies from the bad? Simply subscribe, and track the investments. Was there a legitimate opportunity to make money? Do they have a track record of providing subscribers with great opportunities? You’ll start to notice quickly if you have subscribed to a good newsletter or not.
One other tip I would offer to you is not to invest more than 20% of your overall portfolio in penny stocks. You are investing to make money and preserve capital to fight another battle. If you put too much of your capital at risk, you increase the odds of losing your capital. If that 20% grows, you’ll have more than enough money to make a healthy rate of return. Penny stocks are risky to begin with, why put your money more at risk?
While quite a bit of time and research goes into selecting stocks, it is often hard to know when to pull out especially for first time investors. The good news is that if you have chosen your stocks carefully, you wont need to pull out for a very long time, such as when you are ready to retire. But there are specific instances when you will need to sell your stocks before you have reached your financial goals.
You may think that the time to sell is when the stock value is about to drop and you may even be advised by your broker to do this. But this isnt necessarily the right course of action.
Stocks go up and down all the time, depending on the economyand of course the economy depends on the stock market as well. This is why it is so hard to determine whether you should sell your stock or not. Stocks go down, but they also tend to go back up.
You have to do more research, and you have to keep up with the stability of the companies that you invest in. Changes in corporations have a profound impact on the value of the stock. For instance, a new CEO can affect the value of stock. A plummet in the industry can affect a stock. Many things all combined affect the value of stock. But there are really only three good reasons to sell a stock.
The first reason is having reached your financial goals. Once youve reached retirement, you may wish to sell your stocks and put your money in safer financial vehicles, such as a savings account.
This is a common practice for those who have invested for the purpose of financing their retirement. The second reason to sell a stock is if there are major changes in the business you are investing in that cause, or will cause, the value of the stock to drop, with little or no possibility of the value rising again. Ideally, you would sell your stock in this situation before the value starts to drop.
If the value of the stock spikes, this is the third reason you may want to sell. If your stock is valued at $100 per share today, but drastically rises to $200 per share next week, it is a great time to sell especially if the outlook is that the value will drop back down to $100 per share soon. You would sell when the stock was worth $200 per share.
As a beginner, you definitely want to consult with a broker or a financial advisor before buying or selling stocks. They will work with you to help you make the right decisions to reach your financial goals.