After making a huge pile of money in the past two years, it’s time for us to adopt a radically different strategy when it comes to natural resources…

Over the last two years, the TSX Venture Index – the Dow Industrials of small resource stocks – is up 162%. Readers of the S&A Resource Report recently took profits on several resource companies we bought in spring and summer 2009.

We made 345% on Silver Wheaton, 262% on Silvercorp, 165% on Silver Standard, and 156% on MAG Silver…

While those were all great companies, the gains we generated were largely due to the massive general uptrend in commodity prices. For example, from March 2009 to today, silver rose 163%. The price of copper rose 182%. The price of crude oil rose 149%. Check out the two-year returns:

This recovery is good news for natural resource businesses. The world isn’t ending. People still need copper and crude oil. But these giant moves are in the past.

While some commodity markets will move higher in 2011, it’s unlikely commodity stocks in general will have such a strong tailwind behind them. We have to be super-picky right now…

You see, in a big commodity rally, producers with substandard deposits and inefficient business models can produce spectacular returns. Their margins are thinner than the best players, so if the price of the end product rises even a little, their margins and earnings can explode higher.

[ad#Google Adsense]But when commodity prices aren’t in a big uptrend, we need to switch 100% to quality producers. We have to hunt much harder for value. You don’t have a big tailwind that can absolve your sins and fix your mistakes.

Don’t get me wrong… I’m a long-term bull on most commodities. I see the rise of Asia as a consumer of copper, iron ore, coal, crude oil, natural gas, silver, and platinum as a long-term driver of this market. But all bull markets take breathers. They hit speed bumps.

In the S&A Resource Report, we took profits on several of our highest-flying stocks because I became concerned about an impending speed bump.

Moving forward, we’ll stick to the best companies operating in the best prospective regions (like Canada’s Yukon). We’ll keep buying high-quality positions in the beaten-down, “contrarian’s commodity,” natural gas. And I’m currently combing through the beaten-down former Canadian income trusts to find deals.

But I’m not depending on skyrocketing resource prices to generate gains. It’s been a great run since 2009, but it’s time to embrace a new investment style. We can still make a lot of money in resources, but it’s going to take new thinking to stay ahead of the crowd.

Good investing,

— Matt Badiali

P.S. My top recommendation right now is one of the ultimate ways to own natural gas. It’s one of the largest energy stores in the world. It pays a safe and inflation-proof dividend… one that could soar if gas prices tick up in the coming years. You can click here to access this idea, and more about another resource idea I love right now.

Source:  Daily Wealth