How do so many Aussie investors profit from the resources sector?
The answer: diversification.
It pains me to say diversifying because it's a risk mitigation strategy I resent. I resent it because so many investors use it as an excuse to make poor investment decisions. But clearly, I'm not alone. Warren Buffet believes, "wide diversification is only required when investors do not understand what they are doing."
However despite this, in the resources sector, I believe diversification (if done correctly) is a smart tactic to mitigate risks and grow profits. Even experienced investors use it because commodity prices will fluctuate daily, "significant" discoveries are rare, and management will fail to execute their strategies.
The good news is that, given the high-risk/high-reward nature of the resources sector, you don't have to compromise on the opportunity of making market-beating returns. For example if you bought five high-risk resources stocks today, you may only need two to be winners to succeed in your goal of beating the S&P/ASX 200 (ASX: XJO) (INDEX: ^AXJO).
Although I don't own any of the following five resources stocks (more on that below), I believe they could prove to be lucrative long-term investments nonetheless.
1. BHP Billiton Limited (ASX: BHP) is a better buy than Rio Tinto Limited (ASX: BHP) given its diversified production portfolio. Investing in BHP is a conservative approach to resources investment but could provide shareholders with significant long-term upside potential.
2. Santos Ltd (ASX: STO) is one of Australia's most respected oil and gas companies. With production from PNG LNG and GLNG set to ramp up revenues in coming years, Santos could prove to be a financially sound long-term investment.
3. Sundance Energy Australia Limited (ASX: SEA) is a mid-cap oil and gas play with highly prospective projects in North America. Despite trading on a P/E ratio of 25, Sundance presents as a compelling long-term buy.
4. Independence Group NL (ASX: IGO) is a nickel, gold, zinc and silver miner. With a market capitalisation under $1 billion, Independence Group gives savvy investors exposure to a cheap, well-run, diversified miner.
5. APA Group (ASX: APA) isn't a commodity producer, nor explorer, but provides investors exposure to the resources sector all the same. APA owns gas storage facilities and pipelines connecting urban hubs to producing assets throughout Australia. With LNG production set to boom, APA's share price could too.
The BEST buy of all
All these companies except Independence Group trade on high earnings multiples indicating the market has already cottoned-on to their potential. The aim of resources investors should be to find these stocks before the market.
