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Going Against the Rules
A key to the AMP is making major amounts of money by being in the key sectors of the economy as those sectors "beat" others. Within the sector the selection of stocks is important but secondary to the sector selection.
That is , it would have been more important in 2005 to be in the energy sector than to have chosen the particular stocks in your portfolio.
The AMP is not a well diversified portfolio. This is against a major tenant of market sucess - diversify to protect your portfolio from a sharp decline on a particilar stock.
Real Life, Real Money
For example, I was able to retire at age 58 because in 2003-2005 I was concentrated in energy.Specifically I rode junuior oil and gas stocks up through a tremendous commodity price swing. During that time the public (and then investors) began to focus on energy because of ;
1) Fears of oil production having peaked and anticipation of $100 a barrel oil and $4.00 a gallon gasoline
Some oputright confirmation of decling production in the U.S., Mexico and the North Sea
2) Enron and others driving electricity prices to new highs
3) Hurricaines in the Gulf of Mexico disrupting oil and gas production
4) Middle East wars and unrest threatening supplies
5) U.S. consumption being linked to unfriendly governments in Iran and Venezuala
6) Russia returning to its authoritarian past and using oil and gas as weapons of persuation
7) Every financial paper and news report tracked the maxing 10 % annual growth in China - and now the same in India. That growth is swallowing up energy and just about every commodity around the world.
Investors pschology and their investing patterns follow these news items and seek the investments that will profit from these trends. The major institutional money is "in" before the retail investors . Most investment houses have economists and energy experts who tracked these occurances and shifted major amounts of money. Institutional money leads the market - it is larger and smarter than Joe Blow of Kokeemo. Joe follows the smart money. Joe reads where the market is headed, Joe buys when the talking heads on CNBC talk about where the market has already been.
Peak Oil - the world running out of oil - failed to materialize and the price of oil stopped climbing. Invest funds sold the commodity and institutional investors sold the stocks down in the last half of 2006.
A lot of funds were then in and out and in - metals like:
1) Zinc which London tracked stockfiles fell from years of over supply to a few days
2) Nickel which surplus disappeared altogether and whose price is currently at a record near $20 per pound.
3) Copper that ran up to $4 plus before retreating based on the decline in U.S, housing ( every new house takes 400 pounds of copper)
The move from energy to metals is called Sector Rotation. Moving made your money make money and avoided the trap of holding as energy stock prices fell.
The fear of an economic slowdown meant you coould project the U.S. economy - which uses 25 % of the worlds oil and gas - would use less. A second mild winter meant less oil and natural gas use for heating. So the change in the economic cycle from expansion to a slowdown meant a rotation out of cyclial stocks and energy.
At the same time the Federal Bank in the U.S. was concerned about inflation. To keep inflation from harming the economy interest rate moved steadily higher - another sign of an ongoing slowing of the economy. Higher interest rates hurt the housing boom - in fact putting a pin in the balloon across many parts of the U.S.
Where are we now ?
The AMP porfolio selections are based on the following predictions - as at Valentine's Day 2007
1) The U.S. and world economies continue to expand - particularly China and India
2) In general equities are the place to make money in the long run and we believe it will be the best place to be in 2007
3) It is too early to buy housing stocks , that pain will continue to frighten investors
4) As to areas that remains undervalued we have identified
4.1 Metals - mainly those that China and India require for millions to enter the middle class consumer market
4.2 Uranium - in short supply and steadily expanding demand without steadily expanding supply
4.3 Energy - to be purchased when the fall weather gives us a better view of pricing directions
Big Caps vs Small Caps
The AMP is focused on small companies . There is certainly more risk in owning Blue Pearl
( BLE on Toronto , currently $ 9.10) than BHP the Australian mining conglomerate. The potential rewards are also greater. Other than both being in the mining sector the two companies have little in common.
In the same way we are very fixated in junior uranum stocks. Cameco is the major player in this sector ( CCO on Toronto, currently $45.83 and earnings of millions ). Compare that to Energy Metals ( EMC on Toronto, currently $14.15 - a uranium junior that is just now ramping up to be a producer - with losses as it spends money to bring its properties into production.
Cameco has been saddled with what are termed "legacy contracts" - at least half of its sales are below current market prices due to long term contracts signed when nuclear power was moribund. Cameco had hoped to advance itself with a new mine at Cigar Lake but that mine flooded and won't be open for several years. That failure has helped to push the price of uranium to new highs.
Energy Metals will be selling its output at market rates - now $85 a pound and rising due to new demand from dozen of reactors planned or in construction.
The only results that matter are which stock rises by the greatest percentage in the next year or two.
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