Real investors almost never buy gold stocks.

Mind you, I’m not talking about traders. I’m talking about investors. I’m talking about people who know the value of owning a great business for decades… people who have proven they can intelligently deploy capital and compound wealth at double-digit rates for a generation. Great investors like Warren Buffett, Charlie Munger, and Peter Lynch usually laugh at the thought of buying equity in a gold mining business.

Mining companies use enormous machines and armies of people to dig gigantic holes and pull tons of dirt and rocks out of them. They have relatively small amounts of cash on hand and lots of inventory, property, and equipment. They sell a commodity that can be produced by any of their competitors. There’s no premium brand name in raw gold. All these attributes make mining a low-margin business with lots of risks.

Real investors avoid low-margin businesses. They avoid lots of risks. Real investors are drawn to businesses that require little up front investment and generate thick profit margins. Take Microsoft, a stock I’ve discussed in these pages before…

Microsoft is the premium brand in the high-margin business of computer software. Its net margin – the money left over after all expenses are taken out – is consistently greater than 25%. Microsoft doesn’t have to invest in expensive new Caterpillar excavators or dump trucks. It’s a terrific business with a lasting competitive advantage that real investors love.

But real investors should be buying gold stocks by the truckload right now – just not your typical gold mining stocks… If you want to make a fortune in the next few years, you should be buying "prospect generators."

Prospect generators don’t take the risk of doing actual mining work. They don’t spend money on expensive drilling. They find someone willing to take all the risk in exchange for the opportunity to earn their way into a project. Prospect generators just employ a few smart guys who know their geology. They find gold, get a partner – and hardly spend a penny of their own money.

And right now a lot of these little gold stocks are dirt cheap. Investors are panicked and selling every kind of stock there is, regardless of fundamental value.

The best ones are safer than most stocks, gold or otherwise. That’s because a few of these prospect generators are selling for just a little bit over the value of the cash and securities they hold. Some days, they sell for less… which means you’re getting the cash for a discount and the gold for free.

Buying a pile of cash AND a pile of gold, with more than a dozen chances of making several times your money, sounds like a much better idea to me than buying a gold ETF, or a big cap gold miner, or risky gold futures… or even gold coins, if you’re trying to make as much money as you can, while keeping it as safe as possible.

It’s hard to find a safer combination than cash and gold these days… and right now you can get both – along with tremendous upside – with a few select prospect generators.

Good investing,

Dan Ferris
Daily Wealth