This secret is important… It is the only way I know for you to really make ridiculous gains from investing without taking on crazy risks. The man I first heard the idea from actually did make ridiculous gains following it…

Jim Rogers made more than 4,000% in his Quantum Fund in the 1970s, when the overall stock market only rose 47%. (Then he retired in 1980, at age 37.)

Jim’s track record when he ran the Quantum Fund may be the best of anyone, ever. He was interviewed after he retired for a book called Market Wizards (which first came out in the late 1980s). In that book, he said something that has stuck with me since:

Markets often rise higher than you think is possible,
and fall lower than you can possibly imagine.

This was a revolutionary idea for me, at the time – a true “secret” to ridiculous gains.

Using his own secret, Jim Rogers could have bought oil at $13 a barrel a few years ago, and he could still be holding it at $130 a barrel today. Your typical investor would have sold somewhere along the way. But not Jim.

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(If anyone actually did buy at $13 and hold to $130, it was probably Jim. He started his Rogers Commodity Index Fund back in 1998, when oil bottomed, and he’s still a commodities bull today.)

In the mid-1990s, Jim and I sat next to each other at a black-tie dinner. We talked for hours. He struck me as one of the most original thinkers I’d met. After that dinner, I went back and re-read his chapter in Market Wizards.

I realized his quote, “Markets often rise higher than you think is possible, and fall lower than you can possibly imagine” was incredibly powerful. Once I adopted it, it allowed my readers to make huge fortunes…

The most recent huge winner is Seabridge Gold. I recommended shares of Seabridge at $2.64 to my subscribers a few years ago. Today it’s up to $23. We knew the markets could go higher than we imagined, so we didn’t get out too early. I might not have had the conviction to hold it that long without help from Jim Rogers.

Jim Rogers’ quote has made me – and my subscribers – large amounts of money. But this year, my biggest mistake was forgetting the other half of the quote: Markets can fall lower than you can possibly imagine.

Banks and homebuilders – two things I believe are cheap and hated – have fallen lower than I could have possibly imagined. I bought in too early. I thought I saw a glimmer of an uptrend. So far I’ve been wrong. Jim’s rule was right, as always. So right now, I’m watching my trailing stops closely on these.

If you want to make a whole lot of money investing, you have to stick to your rules. Jim Rogers’ rule is one of the most difficult to stick with… but it is one of the most profitable.

Oil moving up 900% is a great example of the market rising higher than you think possible. And financial stocks and housing, unfortunately, are a good example on the downside.

“Markets often rise higher than you think is possible, and fall lower than you can possibly imagine.”

This rule will make you a lot of money. And both halves of the rule are equally important.

Good investing,

Steve

Source: Fixing My Big Investment Mistake This Year

So what’s going on with gold and gold stocks? Why have they fallen so much? And should you be a buyer or a seller now?

Gold peaked in mid-March of this year – right when JPMorgan (and the Fed) bailed out Bear Stearns. That was the defining moment… the peak in fear in the U.S. And the dollar bottomed at the same time.

The price of gold has fallen from more than $1,000 to below $900. Gold stocks have performed much worse (as you would expect… gold stocks are “levered” plays on the price of gold). The AMEX Gold Bugs Index (an index of gold stocks, under the symbol HUI) stood at 520 in mid-March. It then fell below 400 just six weeks later.

If you’ve owned gold stocks during this time, you’re all too aware of the pain this fall has inflicted. What should you do?

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Let me ask a better question… Just when is the right time to be an owner of gold and gold stocks?

I first recommended buying gold in my True Wealth newsletter back in 2002. I found a way to buy it for $250 an ounce. My basic idea was this:

When is financial catastrophe insurance the cheapest? When you haven’t had a financial catastrophe in a very long time. Gold is financial catastrophe insurance.

Back in 2002, the dollar was extremely strong, and we had no fears whatsoever about our banking system. We hadn’t worried in 20 years. Now in 2008, we have the weakest dollar in recorded history, the worst credit crunch since the Great Depression, and our president has the worst approval rating ever.

The cost of financial catastrophe insurance has soared. Gold has gone from hated to “mainstream.” For that reason, I have actually just moved my gold picks to a “hold” in Sjuggerud Confidential for the first time. I told my subscribers “I think the huge profits in gold are behind us, and the peak in fear has passed.”

Importantly, THIS DOES NOT MEAN SELL. Here’s how I see it:

When I’m sizing up an investment, I look for three things: 1) cheap, 2) hated, 3) uptrend.

Right now, gold stocks are incredibly cheap. For example, Seabridge has 50 million ounces of gold resources in the ground… Here’s some simple math: 50 million ounces of gold, at $1,000 an ounce, is worth $50 billion. Oh, and I haven’t mentioned Seabridge’s 8.2 billion pounds of copper… Keeping the math simple again, 8 billion pounds at $4 a pound is $32 billion worth of copper.

So we’re talking $80 billion worth of metal in the ground. Now I realize it costs real money to get it out of the ground… but Seabridge is selling for $800 million – just 1% of the value of its metal in the ground.

And Seabridge has no debt, no operations really… and hardly any employees. So its “carrying cost” is negligible – about 5 cents per ounce a year, according to its most recent corporate presentation.

So gold stocks like Seabridge are very cheap. They’re also hated… Investors who just got into gold – only to get slammed – are running for the hills. Once again, we’re returning to a place where no one’s in gold but the diehard “gold bugs.” And they never give up…

In the 1970s, gold fell more than 50% a few times on its way from $35 to $850 an ounce. So to me, the recent fall in the price of gold (and gold stocks) is simply a normal correction in a gold bull market.

The long-term uptrend is intact… Gold has soared from $300 to $900. And the Gold Bugs Index is up from 40 in 2001 to over 400 today… I’d say that’s a long-term uptrend!

So I believe Seabridge is still worth holding. It’s making the right moves… It’s in the process of selling noncore properties and using the proceeds to buy back shares (this helps create a price floor for the stock). Seabridge is also moving its main project toward feasibility. These moves are dressing the company up to make it more enticing to a future buyer.

Other smaller gold companies are doing similar things.

I can’t know where and when the fall in gold and gold stocks will end. I do know that it can be very painful… Based on the experience of the 1970s, we should expect to see some major downward moves during the overall uptrend.

But I still think that gold stocks are cheap, gold investments in general are hated now, and the long-term uptrend is still here. I’d suggest buying back in at the first signs the short-term trend is back in the price of gold and the Gold Bugs Index.

Good investing,

Steve