Editor’s Note: The world’s most successful investors know that bad news is good news.
That’s because bad news makes great stocks cheap.
In today’s essay, which originally appeared in DailyWealth, value investor Dan Ferris reveals why investors who can look past the bad news today have incredible opportunities to make a lot of money over the next few years.
Why Bad News for Resource Stocks Is Good News for You
By Dan Ferris, editor, Extreme Value
Warren Buffett has often said, “Bad news is the friend of the long-term investor.”
Bad news leads to lower stock prices. Without low stock prices, it’s basically impossible to use the stock market to make a fortune.
You must buy low and sell high. But the only way you can buy low is to buy stocks when they’re cheap enough. That usually requires some bad news to come out about the company you’re looking at or the industry it’s in.
When the rest of the world is selling stocks in a panic, great investors are calmly scooping up bargains amid the chaos.
Great investors were buying in 2009, after the market had fallen almost 60% from its October 2007 peak. Great investors were buying in late 2011, when the market was down 20% from its May highs.
Today, great investors are buying natural resource stocks… and looking for other resource-related opportunities in anticipation of a great buying opportunity.
Let me explain…
Bad news is all around, especially among commodity-related businesses.
Take iron ore, for example. Iron-ore prices are hitting fresh five-and-a-half-year lows, around $63 per ton. At that price, roughly a third of global iron-ore producers are losing money.
High-cost producers are feeling the pain. Cliffs Natural Resources shut down both of its Canadian iron-ore mines (with costs higher than $70 per ton).
One of them, the Bloom Lake mine in Quebec, just announced it’s seeking protection under the Canadian Companies’ Creditors Arrangement Act (like bankruptcy in the U.S.) just one day after Cliffs eliminated its dividend payment. Steel producer U.S. Steel sought the same protection in September.
Copper prices are hitting new five-and-a-half-year lows, too – less than $2.50 per pound…
With such a drastic move, it’s little surprise the biggest U.S. copper miner, Freeport-McMoRan, recently said it’s cutting its 2015 capital budget again, this time from $7.5 billion to $6 billion, having already cut it from $9.5 billion.
So, why is all this bad news so wonderful?
Because bad news makes great stocks cheap. Great investors can take advantage of these “bad news” opportunities because they know what stocks they’d like to ownbefore the market falls.
For example, we recently recommended a fantastic royalty stock in my Extreme Valuenewsletter…
I can’t tell you the name out of fairness to my subscribers. But this royalty stock hasn’t been this cheap in nearly six years. And it’s a royalty on one of the best-run mines in the world, which has another 50 years’ worth of metal in the ground today. So, it’ll be paying out cash to shareholders for a long, long time.
It’s insanely rare to get a royalty this good at a price this cheap. But we were ready for it. We knew this stock was out there, and we just waited until it got cheap enough. Now, Extreme Value readers who buy it should enjoy a 9%-10% yield for years to come…
Wouldn’t it be great if you knew which stocks to buy every time the stock market went down a lot?
Other people would be panicking. But you’d be buying with confidence, knowing you’re getting shares of a financially solid company with a great business, that will survive downturns, keep growing, and that will take off when the market comes back (which italways does).
That’s exactly what you should be training yourself to do today.
I can’t know exactly when iron ore, copper, or other natural resource stocks will start rising again, but it could be sometime this year. Right now, many solid resource businesses are trading at their lowest prices since the financial crisis, more than five years ago.
Investors who can look past the bad news today and single out great resource businesses selling at great prices have an incredible opportunity to make a lot of money over the next few years.
These investors, like my Extreme Value readers, will be better prepared when stocks turn down (as they always do eventually) and some of the richest when they turn back up (which they always do eventually).