Starting Now: 57% And 45% Annual Gains In Boring Investments
By Dr. Steve Sjuggerud | 20 September 2010
Coal and steel What could be more boring? What is there to get excited about? Where's the sizzle? You'd be surprised.
Steel companies and coal companies are volatile They boom and they bust, sometimes violently. Both steel stocks and coal stocks fell more than 80% from peak to trough in 2008. Then they both soared over 150% from the bottom in March 2009 to the end of 2009.
With "boom and bust" sectors, often a simple trend-following strategy can make you a heck of a lot of money in this case, 57% and 45% compounded annually, as I'll show. Two exchange-traded funds from Market Vectors allow you to trade steel stocks (SLX) and coal stocks (KOL). We tested both of these funds with a simple trend-following system— and came up with ridiculously good results.
Steel stocks rise at a compound annual rate of 45% a year in "buy" mode, and lose money at an annualized rate of 24% in "sell" mode. That's compared to +19% for buy-and-hold. (The data we used on the underlying index goes back to 2001.)
Coal stocks had an even better performance but a shorter track record. Coal stocks rise at a compound annual rate of 57% in "buy" mode, and lose 43% a year in "sell" mode. Buy-and-hold gets you 16% gains a year. (The underlying coal stock index goes back to 2004.)
I can't divulge the particular trend-following strategy we used But I will tell you it is extremely simple, and it's the same simple system for both coal and steel. With "boom and bust" sectors like these, the exact system isn't that important, believe it or not. And you don't want it to be complicated.
You see, the more complicated you make your system— the more you try to "curve fit" your data to improve your results— the less chance the system will work going forward. I've recently hired an actuarial scientist and a Ph.D. in math. We are busy crunching numbers— studying all kinds of systems, ratios, and strategies that have worked historically.
While there's no guarantee that what worked yesterday will work tomorrow, we believe we are on to something great. These two showed me the simple steel and coal trends. You will certainly hear more about what they're up to in the next few months.
This particular type of trade is not well-suited for my typical True Wealth reader. But if you have a more speculative bent, you may want to consider taking a flier on the steel and coal funds today If you happen to catch the start of the next big move, with history as our guide, you could make some fantastic gains. Set a trailing stop to limit your downside risk, keep your upside potential unlimited, and let 'er rip!
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