The Trend is your friend

Alfonso Colombano

While technical analysis is a great tool to time the markets, trying to get market timing right is no easy task.

In my opinion, the best way for most investors to make sustainable gains is to simply invest with the bigger cycle. As we have spoke before about cycles, basically the most important cycle is the long-term bull or short market for whatever asset class you are evaluating. By studying cycles, most investors that do not want to divert their time away from their main profession or business, can comfortably and safely invest in several asset classes.

We know that equities cycle tend to run from anywhere to 18-24 years. The last US bull market we had lasted from 1982-2000. Commodities cycles also last about the same range of time, but their performance is opposite of that of stocks.

My main point is that for the vast majority of investors, rather than trying to time the market, the best solution is to do what’s called dollar cost averaging in the current bull market, which is mainly commodities. Dollar cost averaging, as defined by Wikipedia, is simply  “form of investing equal monetary amounts regularly and periodically over specific time periods (such as $100 monthly) in a particular investment or portfolio.”

For example, an investor that had accumulated precious metals and resource stocks in the past 10 years, would have probably outperformed all of the of the major “diversified” funds. Another advantage of investing in commodities directly is that there’s a lot less evaluation to be done. Even though we recommend investing in commodities producers, there are always extra risks such as management, financial reporting and others that you do not get with the physical commodity. Oil has gone from roughly $10 in 1999 to $107 currently, an increase of roughly 10 times. In about the same time, ExxonMobil, the largest private integrated Oil & Gas Company in the world (before 1999, Exxon), has increased from $33 to $84 currently, (an increase of 2.5-3 times).  The same holds for many other resource producers. Of course, it is always advisable to own these stocks in a commodity cycle since they have outperformed other sectors’ stocks.