Welcome to my dark little corner of the investment world. Miles away from conventional wisdom, and concealed from view beneath hovering forests of hopeful green shoots, a CAPS member by the name of silverminer hikes a solitary path.
You will find my approach entirely unconventional -- and potentially very high-risk if my underlying thesis proves faulty -- but by sharing my strategy and experiences with you I hope to promote discussion on a range of investment topics. You can achieve investing success (or failure) by traveling any number of potential paths, but silverminer represents the strategy I personally will follow until I see the U.S. dollar emerging from crisis mode.
A quick background story
My flagship CAPS portfolio, TMFSinchiruna, became a nightmare of a roller coaster last year. Made up almost exclusively of commodity-related equities, both my CAPS and real-life portfolios took a monster dive that tested my commitment to my investment thesis to the core. From the top CAPS scorer among long-only players in February 2008, I fell to the absolute opposite end of the spectrum.
Exasperated, I added picks that strayed from my core focus. Second chances are free in CAPS, but not in real life, so fortunately I changed nothing in my actual portfolio and have since found some welcome relief. The whole episode serves as a terrific reminder that my sector-focused investment strategy carries a high degree of volatility and risk. Confidence in my fundamental macroeconomic analysis, however, lessens my own perception of risk.
By the fall of 2008, the massive disconnect I perceived between the deteriorating fundamentals of the U.S. dollar and the continued free-fall in commodity-related equities sparked a renewed commitment to communicate my bullish outlook for dollar-defensive investments. With the passion of all my conviction, I encouraged Fools to consider precious metal producers like Yamana Gold (NYSE: AUY ) and Silver Wheaton (NYSE: SLW ) at the moment they reversed into a dramatic recovery.
A silverminer is born
Around the same time, on Nov. 19, I started the silverminer portfolio to focus narrowly on my investment strategy. As a long-term buy-and-hold investor, I find it ironic that timing played a significant role in this new portfolio's outperformance of the S&P 500. Started near the (presumed) bottom of the commodity correction, after four months the portfolio climbed to that same No. 1 spot among long-only players where my original portfolio had once sat. I try to dissuade investors from attempting to time the market, especially a market as volatile as precious metals. Sometimes, however, opportunity smacks you square in the face.
Core holdings for the long haul
I had a short list of equities and a few exchange-traded funds in mind for each of the four sectors I sought exposure to. I started out with companies like those mentioned above for gold and silver, Southern Copper (NYSE: PCU ) for copper, Peabody Energy (NYSE: BTU ) for coal, PotashCorp (NYSE: POT ) for agriculture, and Petroleo Brasileiro (NYSE: PBR ) for oil.
ETFs like the Market Vectors RVE Hard Assets Producers ETF (AMEX: HAP ) , tracking an index by legendary investor Jim Rogers, helped to round out long-term selections.
Having some fun along the way
CAPS is more than a game: It's a thoroughly enjoyable exercise. I approach it the way a pilot would think of a flight simulator ... a tool that constantly hones your skills no matter your level of expertise.
To reduce risk, I ended some silverminer picks gradually on the way up. My score would be higher if I had let them ride, but I believe it's important to never regret locking in investment gains.
Any CAPS pick closed while outperforming the S&P 500 by more than five percentage points improves a Fool's accuracy score, and accuracy accounts for one-third of a player's overall rating. To bolster accuracy, I've sprinkled a touch of near-term trading onto my buy-and-hold foundation. In real life, I trade minute positions around my core holdings when I perceive near-term peaks and valleys within the longer-term bull market for commodities, and this is the behavior I seek to mimic in CAPS. When successful, this practice can enhance the returns of a buy-and-hold investment strategy, but it's also a lot of fun!
Only time will tell
After only eight months, the success of this silverminer portfolio doesn't mean much yet. An investment strategy must outperform over a very long period to be proven viable, but I wanted to share the strategy with Fools in case it helps inform their own deliberations about strategy. Outperforming the S&P 500 by 36% since November, the portfolio has experienced a nice start, but doesn't hold a candle to the long-term 42% outperformance by Motley Fool founders David and Tom Gardner with their flagship Stock Advisor newsletter service. I stand on the shoulders of giants, but I'm learning every day. Start your own CAPS portfolio today, and learn alongside me.