How to Know if You Should Buy ANY Commodity Investment

There are lots of reasons to sell an investment. Most of them probably have nothing to do with the quality of the underlying asset you bought in the first place or whether you believe it will go up or down. You might need cash. You might like another investment better. You might need to close out a position for some wacky tax concerns.

But as legendary investor Peter Lynch says, people only buy an investment because "they think the price will rise."

But how do you know when you should sell, or buy?

Besides reading the actual earnings report of the company you're buying, and understanding its financial situation, there's also a little trick that professional investors use to confirm their suspicions.

I first learned this trick from my friend, colleague and expert resource investor George Stubos.

George told me that no matter how great of a story he hears, or how solid a company's finances look, he always uses one trick to see if he's got a live one on the line, or if he's tugging in an old boot.

Simply put: he tries to sell the investment in the open market.

If he can't sell a small lot of shares at current prices over a period of time, how can he reasonably expect to make money buying them?

If you're unfamiliar with "selling shares" it's also known by another name: shorting.

In essence, you borrow shares today and sell them at today's prices. You buy them back later, to repay the borrowed shares.

If the stock goes down you make money.

If it goes up, you lose money.

I know it can be a chronological mind-trick to wrap your head around the idea of shorting – but it's really just a normal stock transaction in reverse. You sell first – then buy later.

But if you can't sell 100 shares of XYZ corporation at $10 now, how will you be able to sell 1000 shares later for a profit?

It seems like a bizarre trick – but George's advice works because when someone is trying to sell you on a stock, they're selling you on it for a reason.

As I said before, they might be doing it for any number of reasons: for tax purposes or they might like another stock better. Maybe they actually want to do you a solid and they're tipping you off because they genuinely like you.

But more often than not, when someone says they're doing you a solid, they're probably doing you a solid blow to your brokerage account.

So on the very, very likely occasion that your "buddy" with the stock tip is trying to fleece you, you'll either make money or your short position won't be filled. So shorting 10% of your usual position will let you test the waters.

That's better than the alternative.

If their tip turns out to be correct, you can always buy back your shares at a loss to close out the short, and then buy a standard position.

If you're not comfortable shorting shares because you think it's risky – well, I know I probably won't change your mind in this letter. But it's really no more risky than buying shares. It's exactly as risky in fact – and I'm guessing you don't let your losses prevent you from buying more shares, do you?

Take the plunge: short 5 shares or even 1 share on a stock you heard a "hot tip" about or one that you seem to read a lot of bullish advice on.

I don't think you'll be disappointed.

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