Investing in resource securities puts out many investors and many others simply will not touch them in principle. Start-up stories of failed resources drop the shattered dreams of many speculative investors and many still remember how the GFC shattered our miners of the "market treasure" into a thousand pieces (even if anyone who resisted would have cheered for the mining boom of 2009-2012).
However, there are some simple rules that, if followed, can give investors (in my opinion) a certain certainty and hopefully some returns when it comes to ASX resource resources.
Rule 1 – Stick to traditional raw materials (unless you know what you're doing). Yes, I know your best friend tells you that the future is electric cars that will use all graphite, cobalt and lithium, but for most of us it is better to stick to traditional products like iron, gold, copper and oil. This is one reason why most of the biggest ASX miners deal with at least one of these raw materials. Demand models are usually more predictable and not subject to industry-specific fluctuations.
Rule 2 – Invest only in companies with low and sustainable cost bases. An iron ore miner like Fortescue Metals Group Ltd (ASX: FMG) has a base of US 12.36 per ton. Since the current price of iron ore is north of US $ 100 per ton, you know that Fortescue is not likely to go broke early. Fortescue and other iron miners like Rio Tinto Ltd (ASX: RIO) have shown relatively low cost bases and thus give me confidence in their ability to keep the ship tense through the feast and famine.
Rule 3 – Buy low, Sell high. It sounds simple, but many investors ignore this gold rule. The prices of raw materials are very cyclical and the big money follows them. You'll see accumulating cash in gold miners like Newcrest Mining Ltd (ASX: NCM) when the gold goes up in value and vice versa. These trends are predictable and repetitive. You could be a contrarian and buy Newcrest or Woodside Petroleum Limited (ASX: WPL) when the price of gold or oil is low, wait for the tide to change and sell when others are buying. Rinse, repeat.
If you follow these rules, in my opinion, you have a good chance of getting good returns with stocks of ASX resources. Make sure you do research on the companies and raw materials you are looking at and you will start to see what to look for.
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Motley Fool collaborator Sebastian Bowen has no position in any of the stocks mentioned. Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all have the same opinions, but we are all convinced that, considering a wide range of insights, we have become better investors. The Motley Fool has a disclosure policy. This article contains only general investment recommendations (with AFSL 400691). Authorized by Scott Phillips.
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