Praise, like gold and diamonds, owes its value only to its scarcity.” – Samuel Johnson

“You want me to do what?!”

I don’t usually respond to a request from Michael Masterson that way. But this time it sounded like he was asking for too much. He wanted me to give ETR readers a surefire way to make money off of their investments in 2008.

Now Michael had to know that 2007 was a topsy-turvy year for the market. And I’m sure he knew that the “junk and gunk” sectors that led the market up for much of the year – tech and oil – have led the market down over the past couple of months (with the help of big banks and investment houses like Merrill Lynch). And what more can be said about the subprime slime and the credit crunch catastrophe? It’s generated enough bad news on a weekly basis to make Wall Streeters afraid of their own shadows.

Wall Streeters don’t know what to invest in anymore. And that’s why they’ve fled into the safest investment haven there is: U.S. Government Treasury bonds. But as a result of all this crazy buying, the yield of T-bonds has been driven down to around four percent. (Bond yields move in the opposite direction of their price.) So if, as my “surefire” advice, I were to tell you to put your money in T-bonds, you’d barely be making above the rate of inflation.

That’s not what Michael had in mind.

But if Wall Street doesn’t know what to invest in, what made him think I do? How could he possibly have guessed that I do, in fact, have a great way for you to make money in 2008?

I sure don’t remember telling him about it. To tell you the truth, I was too embarrassed… because it is so simple.

But the results speak for themselves. It worked great in 2007. And I’m convinced that it’s going to work just as well in 2008.

You see, my “surefire” method is something we all learned by the third grade. I figured it out from trading baseball cards with my friends. Some cards were more desirable than others. For example, everyone wanted the Carl Yastrzemski rookie card – but, as far as I knew, only Frankie and Mike had one. Two cards and about 40 eight-year-olds who would do anything to get them. You can imagine the tempting offers Frankie and Mike got.

The lesson: In a shortage, the suppliers hold all the cards. (Sorry, I couldn’t resist.)

This is something so basic I hesitate to bring it up even now. As an investor, you probably want me to tell you how to take advantage of high interest rates overseas… or the weak dollar… or a country with a stock market ready to soar to new heights.

These are so-called sophisticated ideas, taking advantage of the latest little twists and turns in near and faraway markets. But they don’t beat investing into shortage situations. Hey, just because it’s a ridiculously simple concept doesn’t mean it can’t make you rich!

It has worked magnificently for me. And there’s no reason it can’t work for you.

It is the way I now choose most of the stocks I recommend to my subscribers. I could have begun doing it five years ago. It would have worked fine. Heck, it would have worked 50 years ago.

But now is the perfect time to adopt this simple investing strategy. Here’s why:

  • Right now, we live in a resource-constrained world. It’s not just one thing – like oil. There are shortages across the board.
  • Robust growth is everywhere you look. Europe, Asia, South America – economies are strong and growing and needing more energy, raw materials, and industrial inputs.
  • Billions of people are being welcomed to the global economy. Huge swaths of population – from Eastern Europe to Russia to China and Vietnam – have joined the global economy and, for the first time, have a little cash in their pockets to spend on cars, TVs, and washing machines. For better or for worse, it’s putting extra demands on our energy and resource base.
  • Mining isn’t what it used to be. The easy-to-mine stuff has already been discovered and exploited. What’s left is harder to get to and in more remote areas.
  • Mining companies have more hoops to jump through. Throw in all the permitting and environmental regulations we now have, and getting a mine up and running is a long and arduous process.

The upshot? There are more shortage situations and it takes longer to recover from them. As an investor, that’s great. There are more choices than ever and plenty of time to get into and out of these investments.

So, in a year when the Dow has been on the stingy side, what kind of returns can you expect from investing in companies that are taking advantage of shortage situations? No data is available to easily answer this question, but I can show you how such companies that I recommended in my Wealth Advantage and INCOME portfolios did in 2007.

  • Carbon fiber manufacturer: up 3 percent
  • Surface and underground mining equipment company: up 80 percent
  • Diversified miner of copper, coal, iron ore, diamonds, and other minerals: up 80 percent
  • Uranium company: up 220 percent
  • Mid-sized integrated oil and gas company: up 3 percent
  • Coal producer: up 20 percent
  • Oil services company: up 7 percent
  • Utility with oil and gas properties: up 40 percent
  • Oil tanker company: up 40 percent.
  • Water company: down 10 percent.

Of these 10 investments in my Wealth Advantage and INCOME portfolios, nine were winners. My overall return for the group was 483 percent. And my average return per stock was just under 50 percent.

And I’m not even including my solar stock recommendations, because solar modules aren’t technically in short supply. But the market for solar comes from the looming shortages in our traditional energy supplies, especially oil. One of my solar selections gained 240 percent and the other returned a profit of 142 percent.

As well as this group of shortage companies did, it could’ve done better, because a couple of these stocks have just recently turned the corner. For example, the carbon fiber company recently reported great fourth-quarter earnings, causing its shares to spike an amazing 20 percent. It’s shaping up to be my star next year.

If I were to tell you, “Invest in the stuff that makes money” – well, that’s pretty vague… and not very helpful. But investing in shortages is about as close as you can get to following that advice.

What’s easier to understand? If there’s not enough of something, the price goes up. And the supplier doesn’t have to spend money or effort chasing customers. They chase the supplier.

There’s just one thing, though. And it elevates the concept from the third-grade to the fourth-grade level.

Shortages come and go. So you can’t be backward-looking. Companies don’t make money on last year’s shortage. They make money on this year’s. And as an investor, you make money on next year’s shortage.

So let me share with you what I know from spending hundreds of hours dissecting the natural-resources sectors. The uranium shortage has seven or eight years to go. The oil shortage will gradually get worse. Carbon fiber will fall short of demand for at least five years, but it could easily be 10 or more. Water shortages tend to be local. That’s true overseas as well as here in the U.S. But the overall trend is a deteriorating water supply, especially overseas. Nickel and copper will be in short supply for at least another four or five years.

All shortage situations go through the same four basic stages. Knowing them will help you figure out when to get in and out of your investments.

Stage One: Dropping demand accompanied by low prices. There’s little capital investment in the sector.

Stage Two: Rising demand accompanied by increasing prices. Companies grow profits from rising prices.

Stage Three: More production comes online. Everything comes together during this phase. Greater volume and higher prices jack profits WAY up. It’s the high-point of the cycle.

Stage Four: Supply and demand rebalance. As production catches up to supply, prices stabilize and eventually fall. Production contracts as prices become less and less attractive.

The best time to invest? It’s not in Stage Three, when profits are at their highest. That’s too late. The company has already become a magnet for investors, driving its shares up. Plus, since investors are forward-looking, they’re already anticipating the excitement-dousing Stage Four and will soon begin selling their shares.

The latest stage to invest in would be Stage Two. But even better would be to invest toward the end of Stage One. This is when the company should be a screaming bargain, and good things usually begin to happen shortly thereafter.

As the cycle winds down, you’ll have plenty of time to get out of these companies before they’re in the “bust” part of the “boom-and-bust” cycle. But you need to know your stages. The end of Stage Three or the beginning of Stage Four is when you get out. It makes sense, yes? After all, by Stage Four we no longer have a shortage situation to play.

When we go to the store, shortages take money out of our pockets. But, as investors, we can earn that money (and more) right back. We’re living in the age of shortages. And knowing how to take advantage of it happens to be the easiest way to make money from investing.

[Ed. Note: ETR’s Investment Director, Andrew Gordon, is the editor of INCOME, a monthly financial advisory service that uncovers income-generating stocks that promise safety (first and foremost), along with much-higher-than-average profit potential.]

Andrew Gordon

Andrew Gordon is a former editorial contributor for Early To Rise Investor’s Edition. He has 20 years of experience working in infrastructure and environmental projects around the world. When he wasn’t traveling, he taught marketing and finance courses at the state university of Maryland. Mr. Gordon has authored several books for McGraw Hill and other publishing companies on energy markets, global countertrade practices and the hot growth sectors of China and Russia. He is also a top-rated speaker at financial conferences.