Some interesting thoughts on trading from Peter Hodson, portfolio manager of the successful Sprott Growth Fund:

In other words, find a quality stock with momentum.

It is a general principle that also drives Peter Hodson, senior portfolio manager at Toronto-based Sprott Asset Management Inc.

"I'm a big believer that strength is a better thing to buy than weakness," he says.

"I've made far more money buying new highs than new lows, that's for sure."

Mr. Hodson says he rarely buys on downticks unless it's "the kind of panic situations where people are behaving irrationally and selling everything willy nilly." He cites as examples last Aug. 16 and this past January, when markets tumbled.

As a growth investor, Mr. Hodson says he is puzzled by people who are reticent to buy when a stock is on the high side.

One of the reasons for this, he says, is that "they've looked at where the stock's been and they beat themselves up saying, 'I could have had it at half the price six months ago. I must have missed it.'

"I hear that from investors all the time."

But he says investors have to change that thinking: "The price is the price. You have to decide if it's worth the current price. Where it was four days ago or six months ago is irrelevant."

One other point that Mr. O'Neil makes, and with which Mr. Hodson concurs, is many investors would rather buy large amounts of low-priced stocks over smaller amounts of higher-priced stocks, a tendency that can also undermine investing in quality stocks.

"[That tendency] clearly exists," Mr. Hodson says. "Once again, it doesn't make any sense logically or mathematically. But yes, that's why there's a market for penny stocks."

Dennis Gartman, editor and publisher of the Gartman Letter, seems to think the subprime mortgage crisis is "through seven and a half innings in a nine-inning game."  Whereas John Embry, the Chief Investment Strategist at Sprott Asset Management, responded with "To say we're in the seventh-and-a-half inning is pathetic."  Embry thinks anyone who buys U.S. bank stocks in this environment is "throwing good money after bad.  They look god-awful.  I wouldn't buy any of them."

Read more to find out what else these experts have to say on gold, oil, Canadian banks, and the Canadian dollar!

I am so confused over U.S. banks at the moment.

On one hand, I see Ian Cumming of Leucadia buying banks that to me look like babies thrown out with the bath water.  They had nothing to do with sub-prime lending and hold no toxic mortgage paper.  Furthermore, at those same banks, insiders are buying.

In addition, I just read an article about Anthony Bolton, the famous UK investor with a 27-year 20.3% record, and he says it is time to switch out of commodities and into financials.

On the other hand, Eric Sprott seems to think things are getting worse with the banks.  The picture Sprott paints is so dire it makes you want to pull all your money out of the U.S. markets for a collapse might be near.

I would say all these guys are pretty smart and have fabulous track records.  This is why I'm confused!  I guess time will tell who's right.  And who knows, they might all turn out to be right depending on how bad the market drops and which banks survive.

I have been watching the action on Questerre Energy (QEC.TO) over the past month as the stock has gone from $0.36 to $4.91.  I also watched Peter Hodson on BNN the other day and he recommended Questerre as a Top Pick.  What's interesting is that he said the moment they sniffed things were changing at Questerre, they [Sprott] piled in.  And this was when the stock was at $0.50!  Not bad as that is almost a 10-bagger in a month.

I continue to be impressed by the Sprott team.  I don't know how they do it, but they always seem to be on top of the latest macro-trends and in super-early on the latest high-flying stocks.

From the Globe and Mail:

Star hedge fund manager Eric Sprott admits he was taken aback by his company's less than stellar stock market debut Thursday, and figures short sellers were behind the massive trading volume.

"I have to believe or think or conclude that there must have been some significant short selling," Mr. Sprott, the founder, chairman, chief executive officer and controlling shareholder of Sprott Inc. [SII-T], himself a short-seller of no mean repute, said Friday.

"I can't believe that on a 20-million-share issue that 12 million shares, approximately, should trade - it's ludicrous, " he said in a telephone interview before stock markets opened Friday and the shares fell again.

...

Mr. Sprott said this depends on whether investors believe in the strategy of betting heavily on precious metals, energy and other resources his firm has used to generate sparkling returns and a reputation as one of Bay Street's brightest shops.

"It's certainly a robust valuation if you don't believe in what we do," he said. "If you do believe in what we do, it's not that robust."

He also argued that market players who think the resource and energy boom may already have peaked are dead wrong.

"Everybody in the world is trying to call the end of resources," he declared. "They're just wrong every day and every day they look worse."

Mr. Sprott also cited his firm's rapid growth and strong returns in defending the IPO price.

"We've done well for a long time, we're doing well this year and we think we're well-positioned," he said. "If we can repeat our former performances, we will, I think, more than substantiate that valuation."

Eric Sprott just released an article on Peak Oil today.  A thought-provoking, and even somewhat scary, read.

An article about Sprott's IPO and general investing style:

It's probably going to be hot and much in demand as investors recall once-controversial predictions of founding guru Eric Sprott that have come true.

What's odd about this is that while IPOs mostly thrive on optimism about the future, Sprott, 63, is best-known for predictions of doom for the financial system.

A recent sample: "We're in a systemic financial meltdown. There are probably 10 companies that are broke that are still trading.'' Another prediction: Gold is going to US$2,000 an ounce in this cycle.

These opinions could be written off as those of a maverick contrarian if the record did not show a series of big-picture and highly profitable timing calls such as on uranium around US$10 in 2003. Recent price: US$71. A closer look at the investing style of his flagship Sprott Canadian Equity Fund reveals, however, that the fund's standout 28% return over the past 10 years was very much the result of successful bets on tiny unknown speculative stocks.

Big-company stocks don't turn Sprott on. Indeed, they are often the targets of his short-selling prowess.

For many of us this performance might be viewed as the triumph of hope over experience, like a second marriage, according to that old curmudgeon Samuel Johnson. Certainly, it required a lot of optimism. Such bets and timing calls don't always work out, of course, even for Sprott.

A look at individual annual returns shows that buying into this style provides a bumpy and nerve-wracking ride. The fund's best year recorded a 100% gain. The worst served up a 39% plunge.

From Bloomberg:

Turmoil in global credit markets may lead to the collapse of a North American bank, pushing bullion prices up to $2,000 an ounce as investors seek a haven in gold, Eric Sprott said.

This year's decline in banking and brokerage stocks will worsen, said Sprott, 63, founder and chairman of Sprott Asset Management, which manages about $7 billion. In response, the company is short selling financial stocks and increasing holdings in bullion and mining companies, Sprott said. He declined to name which bank he thought may collapse.

"We're in a systemic financial meltdown," Sprott said in a March 6 interview at the company's Toronto headquarters. "There are probably 10 companies that are broke that are still trading -- banks and financial institutions."

...

Sprott said his company's offshore hedge funds have increased the proportion of gold in their portfolios to about 30 percent. The company is also buying small mining stocks that have yet to "blossom," including Dynasty Metals and Mining Inc., Golden Star Resources Ltd. and MAG Silver Corp., he said.

...

The Sprott Gold & Precious Minerals Fund and the Sprott Canadian Equity Fund have both more than doubled in the past five years. The S&P 500 Index gained 58 percent in the same period.

Sprott says the collapse of U.K. mortgage lender Northern Rock Plc in September precipitated some bullion purchases by skittish depositors seeking a safe investment for the money they had withdrawn from the bank. That presages the larger effect that a banking failure in North America would have on gold demand, he said, since investors will have few good alternatives.

"Government bonds are a joke at the interest they're paying," Sprott said. "You can buy gold, or other real things: gold, silver, platinum, palladium, things that hold value."

Jean-Francois Tardif, from Sprott Asset Management, posted an interesting article on timing the markets using the VIX.  This is what he said:

As the Opportunities strategy applies a primarily bottom-up approach to investing, we consider ourselves stock-pickers above all else. Accordingly, despite the unstable market environment, our bottom-up analysis identified several new investment opportunities for the long portion of the portfolio during the month. Many companies that already exhibited above average growth, earnings, and free cash flow, also began trading at attractive valuations after the correction in January. We took advantage of this fact during February, buying more of our favorite names and adding some new positions to the portfolio as well.

Nevertheless, despite our bottom-up focus, we cannot ignore the mounting evidence that we are entering a secular bear market. This volatile environment has influenced not only the amount of short-selling opportunities we identify on an ongoing basis, but also the strategy we employ in trading the short side of the portfolio. Essentially, we endeavor to cover a selection of our shorts around market bottoms and then short stocks on the subsequent bounce. One of the tools we use to successfully execute the timing of this strategy is the VIX (CBOE Volatility Index), a widely used measure of perceived market risk that we have addressed in previous market comments. As we transition into March, we are wary of the fact that the chart below indicates to us that another correction may be approaching.

 

Bottom-up vs. Top-Down investing:

From time to time, you'll hear someone say that the stock market is best described as a market of stocks. Translation: When it comes to investment decisions, don't fret over the big economic picture, or things like rising inflation, currency turmoil or shifting economic growth. Instead, look for companies that are likely to perform well over the longer term, no matter what the current investing landscape looks like.

This so-called "bottom-up" approach has a good track record. (It's worked very well for some of the biggest names in the investing business - just ask Warren Buffett or Peter Lynch.) But it's not the only lens through which you can view the stock market. There's also a "top down" approach that focuses on spotting macro trends early. Get the big economic picture right, and the profits will follow - without the fuss and bother of trying to figure out which company will do marginally better than another.

The top-down folks, at least the clever ones, have an advantage over bottom-up investors. Armed with a sense of how the world is changing, they can make bigger bets on specific areas of the market that are likely to succeed. When they make the right calls at the right time on various sectors - say, tech in the 1990s or defence stocks after the Sept. 11 attacks - the results can be spectacular. Take Eric Sprott, CEO and portfolio manager at Sprott Asset Management, for example. He has a well-earned reputation for making bold bets on big ideas and has an uncanny ability to predict highly profitable investing themes. He made an early foray into commodities, for example, well before the current boom drove up stocks across the sector because of surging demand from China.

Sprott on Uranium:

More recently, Sprott has been narrowing his focus to uranium, on the premise that the world is turning its attention to nuclear energy in order to diversify away from oil and to find cleaner energy sources. Sure, he will prefer one uranium producer over another, just like any bottomup investor, but it's the big idea that will drive his results. And it is certainly hard to argue with the numbers he has produced so far: His Sprott Canadian Equity Fund has a 10-year average annual return of 27.5% and is up 20% this year alone. Over the past decade, it has appreciated 1,031%. Those kind of numbers put it miles ahead of the S&P/TSX Composite Index, which has returned about 155% over the past decade and is up just 6% this year.