Relativity Theory

The Yangtze River, originating from the Tibetan plateau, meanders approximately 3,900 miles across China, culminating near the bustling city of Shanghai. Renowned as one of the world's longest and most influential rivers, the Yangtze has played a pivotal role in Chinese history for over 2,000 years.

It has served as a vital water source, an irrigation system for crops, and an extensive transportation network. While sustaining countless lives, the Yangtze has also been responsible for numerous fatalities. In 1931, torrential rains caused devastating floods, leading to the loss of crops and an estimated death toll of 3.7 million people, making it one of the most catastrophic natural disasters in recorded history. 

Another round of flooding in 1954 claimed the lives of over 30,000 individuals. 

In the early 1990s, the Chinese government embarked on a momentous endeavor to tame the Yangtze by constructing an enormous dam. The Three Gorges Dam, spanning over a mile in length and towering nearly 600 feet, stands as the world's largest hydroelectric dam. With a price tag exceeding $30 billion, it generates an impressive amount of electricity and serves as a crucial component of the Yangtze's flood prevention system. 

The Three Gorges Dam symbolizes humanity's capacity to harness formidable forces and employ them for productive purposes. However, it is essential to recognize the inherent risks associated with such structures and the power they wield. 

As an investor, why should you succumb to fear of volatility when you can partake in humanity's legacy of harnessing extraordinary power to create wealth? 

This could be a significant moment for you…

Most investors view "volatility" as a negative term, akin to a spicy pepper in their morning oatmeal. Yet astute investors and speculators perceive volatility as a valuable asset. Being called as “dirty word”, voltatility attributes much to the success of professional investors in the financial realm. 

In fact, it marks a turning point in an investor's journey when they realize that, similar to a mighty river, volatility can be harnessed, channeled, and utilized as a tool. This revelation opens up a world of immense opportunities.

Numerous opportunities arise from the highly volatile commodities market.

If you possess the ability to harness this market's volatility and leverage it to your advantage, you can achieve extraordinary returns in stocks. In just 10 months, you can attain returns that others wait a decade to make. Why is this possible? 

Because commodity prices, more than any other asset, undergo substantial boom and bust cycles. They exhibit what is known as "extreme cyclicality." In a single year, the price of commodities like oil, silver, or copper can skyrocket by 75% and plummet by 50% the following year. In other words, they can be exceedingly volatile.

Consider crude oil as an example. The chart below depicts the price movements of crude oil over a 20-year period, starting from 1997. It is evident that extreme volatility is a defining characteristic of this market, with frequent boom and bust cycles. Volatility is not an exception here; it is the norm. Within a span of fewer than 24 months, price fluctuations of 40%, 50%, and even 60% occurred.

Crude oil isn’t at all an unusual example. Then comes copper in that similar time frame with its remarkable surge in 2021. (Further details can be found in last week's newsletter on Copper Signals).

With lumber, the price of lumber exhibits significant cyclical patterns, characterized by frequent instances of 100% increases followed by declines of 50% or more. The most notable occurrence took place recently when there was a massive surge of 539%. Subsequently, prices have experienced a steep decline of over 72%.

Curious about the reason behind the increased price of your cup of coffee? Coffee has undergone several substantial fluctuations over the past two decades.

And this is for sugar:

And corn:

When it comes to sizzling commodities, due to their inherent volatility, it is usual for commodity markets to experience substantial surges of several hundred percent within a few years. These significant price movements generate vast opportunities. 

For instance, during the 2008-2009 financial crisis, the stock price of Teck Resources, Canada's largest diversified miner, plummeted from CAD$50 per share to less than CAD$4. However, within a span of 12 months, it rebounded and surpassed CAD$40 per share, resulting in a remarkable gain of over 1,400%.

Most financial advisors will advise against entering volatile markets like the ones I've described. Navigating these turbulent waters is not suitable for armchair investors. It's best for them to stick to regularly buying shares in low-cost index funds, accepting average returns, and focusing on their lives.

However, if you're willing to put in extra effort to earn higher returns and aspire to be better than average—say, 10, 50, or even 100 times better than average, then you might consider learning how to harness the volatility of the commodity market and use its remarkable power to generate wealth for yourself. 

I could delve into extensive details on how to harness volatility and profit from it, but ultimately, you need just three key mental assets to turn volatility into a source of capital gains for the rest of your life.

Asset #1: Appreciating a good crisis

Boom. Bust. Echo. Repeat.

The Covid-induced market turmoil in March 2020 serves as a notable instance. The volatility of the market follows this pattern, and while booms can be appealing, it's essential to appreciate the busts as well. You must learn to value a good crisis because that's when you sow the seeds for substantial bull market gains.

As in the essay “An Investment Secret You Might Not Want To Share With Friends” on Katusa Research: During crises, emotions tend to overwhelm reason, causing terrified investors to sell assets without considering their underlying value or cash flow potential. This creates an environment where asset prices become detached from their true worth, presenting opportunities to purchase assets at significantly discounted prices. If you can keep a level head while others are panicking, you can seize these fire-sale opportunities. 

While most investors instinctively sell or avoid markets experiencing crashes, if you're interested in profiting from volatility, you must develop the instinct to buy into those markets. You have to learn to run towards a crisis because it's during these times that valuable assets can be acquired at extreme bargain prices.

Asset #2: Ignoring the desire to be part of the crowd

Being part of a crowd has historically provided safety and survival benefits. Because there is a sense of security in being part of a group, individuals belonging to prehistoric tribes had a lower risk of being attacked by predators or harmed by rival tribes compared to those who ventured alone. Similarly, today engaging in familial and social groups contributes to both happiness and longevity. However, in the investment market, following the herd is a surefire way to lose. Waiting in line to buy assets ensures that you overpay.

Think of how the public rushed into tech stocks before the crash in 2000 or how they piled into real estate before the 2007-2009 downturn. To harness volatility and turn it into profit, you must learn to ignore the desire to follow the crowd. After an asset experiences a bust, nobody wants to buy it, which leads to very cheap prices. There will be little competition when you decide to acquire these assets. The headlines will be discouraging, and if you share your purchases with the average person, they may think you're crazy. These are all signs that you're on the right track. Buying undervalued assets that are currently unpopular can be a lonely endeavor, but it can also be incredibly rewarding.

Asset #3: Knowing when to sell and lock in profits

This may be the most challenging mental asset to acquire and put into practice. It's easy to develop an emotional attachment to a position that has generated substantial paper profits. Once you learn how to buy extreme bargains during crises, you're likely to have some significant winners in your portfolio, doubling or even tripling in value.

It's tempting to fall in love with a stock that has performed well, viewing it as a cherished pet. However, it's crucial to remember that extremely cyclical assets like commodities and natural resource stocks should be treated with a "rent, don't own" mindset. You must be willing to sell these assets once they appreciate in value because it's only a matter of time before they experience another downturn. 

Remember, you don't realize profits until you sell. Your beloved stock is just a piece of paper, so don't become too attached to it. Selling at the right time is key. To understand the essence of natural resource stocks, check this chart of Range Resources from 2005 to 2017. Range (a major North American natural gas producer) saw its shares skyrocket by 489% from 2005 to 2008, only to plummet by 64% afterward. Similarly, from 2011 to 2014, the shares surged by 185%, but then tumbled by 78%. This illustrates the potential for significant gains in resource stocks like Range, but it underscores the importance of timely selling.

To conclude

For those new to the markets, it's understandable to feel intimidated by volatility. The media often portrays it in a negative light. However, the a crucial point is that, it's a pivotal moment in an investor's journey when they recognize that, much like a powerful river, volatility can be controlled, channeled, and utilized as a tool. This realization opens up a world of immense possibilities.

Many of these opportunities exist within the realm of volatile commodity markets. By acquiring the knowledge and skills to harness this volatility and leverage it effectively, you can transform it into a source of substantial capital gains for the long term.