The Drop Test for Easy Investing

05/01/2013 8:30 am EST

Focus: STRATEGIES

Dennis Gartman

Editor and Publisher, The Gartman Letter, L.C.

Dennis Gartman follows a simple strategy that he thinks will do extremely well in the coming years. Watch him explain it here.

My guest today is Dennis Garman, and we’re talking about the steel industry. You know, there’s been a lot of building going on, things are starting to get a little bit better all over the world.

Yeah.

Some of the materials look like they’re doing pretty well from what I’ve read. What do you think are your favorites?

Well, I have this euphemistic statement that I want to own the things that if I drop them on my foot, it will hurt.

That’s a good one.

Well, I don’t understand high-tech. I don’t understand what goes on in a computer chip. I don’t understand Big Pharma. I just went to North Carolina State, so I’m not that terribly sophisticated.

I understand counting steel. I understand rail cars. I understand housing and lumber. I understand things that if you drop them on your foot, it will hurt. I understand, or I think I understand that global economic circumstances are turning much for the better.

There are not many things that you can actually count upon in this world. Your mom probably loves you. Your kids probably don’t like you from time to time. And in periods of economic growth, steel, copper, tin, zinc—the real stuff, in very esoteric economic terms, of economic activity—is probably going to go higher.

Steel prices had been under egregious pressure for the previous four years. I wasn’t smart enough to know where the bottom was, but I was smart enough to understand that when it stopped going down, started to rally, and then when steel prices didn’t make another low, I knew what the risk was. I knew where I would be wrong. Steel prices have held.

Iron ore prices have risen sharply in China, so I want to own steel. I want to own steel companies. I want to own simple things. Whether it’s steel, whether it’s copper, whether it’s tungsten, I want to own stuff. The things that if you drop them on your foot, it will hurt. In a global economic upturn, which I think is what’s happening, they will do well.

You know what’s really nice of them? Most of them pay nice dividends.

Right. Would you buy them in ETF, or would you buy them as individual stocks if you were an individual investor?

I think the better way is to buy the ETF. Because in the Steel ETF (SLX), most of them have seven or eight or nine steel companies. Better for you to do that than to go buy one steel company.

I think ETFs are really quite the way for the average investor, because none of us are smart enough to understand the intricacies of an individual company’s balance sheet. Nor are you smart enough to understand when one individual company’s management may be wrong, bad, nasty.

Thieves, but if you have ten of them the odds of having one of them go preposterously bad on you...if you have ten of them, the odds of any of them going bad are probably slim. If you bought one, the odds of that one going bad is probably pretty high. As we say in this business, the toast always does land jam side down on the floor.

Related Reading:

The Mean Green Commodity Crunch

2 Big Energy Plays for 2013

Returning to the Iron Age

Related Articles on STRATEGIES