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In general, we have always advised our clients, especially those who are relatively new and inexperienced, to stay away from high-risk shares and stick to those shares which are in stable industries, preferably in a service sector, with a high proportion of annuity income. That does not mean that money cannot be made in more volatile shares. Indeed, high volatility implies the prospect of both capital gains and losses. This can be summed up as:
Volatility = Unpredictability = Risk
The more volatile a chart is (i.e., the further that it departs from the ideal of a gently upward sloping straight line) the less predictable it is and hence the greater the investor’s risk.
Companies which rely on the production and sale of commodities are generally reckoned to be the highest risk shares because they are price-takers while their costs can also be erratic. A good example of such a high-risk, volatile commodity share is ArcelorMittal (ACL), South Africa’s last remaining listed steel producer.
On 30th July 2020, in the teeth of the COVID-19 pandemic, ACL dropped to a record low price of just 25c. It is fair to say that it almost went out of business at that time and many thought it would. This must be compared with its highest price of R261 per share on 5th June 2008, just before the start of the sub-prime crisis.
Following its 25c COVID-19 low in July 2020, the share rallied to a cyclical high of 1054c on 20th January 2022 before commencing a new downward trend. As you can see from the chart below, this type of volatility implies considerable risk, but also offers the opportunity to make a substantial capital gain:
 
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<figure class="figure"><a class="lightbox" href="/onlinecourse/images/ArcMittal_aer12feb23.png" data-plugin-options="{'type':'image'}"> <img class="figure-img img-fluid" src="/onlinecourse/images/ArcMittal_aer12feb23.png" /></a>
<figcaption class="figure-caption">ArcelorMittal (ACL): August 2019 - 10 February 2023. Chart by ShareFriend Pro.</figcaption>
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As a private investor, your problem is to choose the best risk/return moments to buy in and sell out.
In its latest financials for the year to 31st December 2022 (<a href="https://senspdf.jse.co.za/documents/2023/JSE/ISSE/ACL/AMSA-FYE22.pdf" target="_blank" rel="noopener">AMSA-FYE22.pdf (jse.co.za)</a>, the company explains the fundamental reason for the precipitous fall of its shares from the heights of a year ago. In simple terms it is a drop in the global price of steel, especially in the second half of the year. Steel prices fell more quickly than the cost of the company’s raw materials. For example, the coking coal price rose by 62% year-on-year in US dollars. Weaker demand also resulted in sales volumes dropping by 13%.
The company is extremely well-managed and reduced fixed costs by 11%, but that was not enough to prevent a 62% drop in headline earnings – which, of course, has been directly reflected in the share’s price.
 
ACL says that they expect the situation may improve in the second half of 2023, but clearly there are many variables and uncertainties.
As a private investor it is difficult to get a reliable understanding of the international steel market and so we advise those who want to buy ACL to wait for a clear break up through the 65-day exponentially smoothed moving average. This moving average is more sensitive to changes in the direction of the share’s price than other moving averages and gave a very good buy signal on 26th November 2020 when the share was at 60c, followed by a sell signal on 26th April 2022 when the share was  about 800c. Applying those signals would have netted a profit of more than 13-fold in less than 30 months.
So, what we are suggesting is that if you have the stomach for the type of risk that ACL offers, you should wait until the share price breaks up again through the 65-day exponential moving average and then buy. Of course, by so doing, you would be attempting to follow the “smart money” into the share – but sometimes that is the best approach. Just don’t forget to implement a strict stop-loss strategy.