I posted the following on the TMF Stock Advisor subscribers board, Stock That Interest You, on 11 July 2007. It was in reponse to a new investor asking whether to invest in BHP, because his fiance was making so much money being invested in it. The ADRs traded for $65.93 that day, three months later BHP hit a high of $85.67 before peaking at $88.88 10 months after my post. BHP ADRs closed at $35.07 on Friday. I’m posting this here for a few reasons:

• The post contains some good usable knowledge for newer investors.
• It is one of my many predictions that have born out to be correct. Yet, despite making predominately correct predictions, I have largely failed to capitalise on any of them. Why is that? It’s like I know the winners of the race, but haven’t had a wager. Is it confidence, conviction, distraction or something else.
• And yes it does make me feel good to be right!

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Following is my opinion. To help you understand where my position comes from keep this in mind. In cyclical industries I take a longer term view and try to ride the easy part of the wave up. I have sold all my resource holdings except one. I am now waiting to try to ride the wave down on the resources industry and am happy to wait for a few years or more if I must. If you want to invest then please be nimble, investing this far in to the upswing of a cycle is dangerous and you need to pay attention. Watch for any signs of weakness coming from China.

The time to buy BHP was a few years back in 2002 or 2003. Their run could continue for years more, but at some point in the future they will be worth less they are now. Unless of course you subscribe to the IIDTT philosophy, “It is different this time”. 

Rio Tinto RIO.AX is a much better managed company for the long term and if someone put a gun to my head and said I had to buy one of these now it would be RIO.

The only advantage I can think of in now going long either of these mining giants is so that you are familiar with the company and the resources boom so you know when it is time to short them. There is of course the possibility of excellent short term gains, but that is a dangerous game. 

Lots of people don’t believe in super cycles, but to me it is simple economics and the pattern repeats over and over again. It is called supply and demand. At the moment resources are in high demand and supply is in short demand so prices shooting higher. The higher prices lead to increased exploration and development. It takes many years to develop mines, wells etc and even longer if you have to discover them first. When the current resources under development start to come on line then the supply will increase and prices will start to fall. Eventually so much supply comes on line that there is over supply and prices start to quickly fall. Exploration stops, development stops, some mines and wells are uneconomical at the lower prices and are closed. Slowly supply become tighter and tighter and then demand begins to outstrip supply and off the cycle goes again.

I see very few opportunities in the Australian market at this point, which isn’t surprising after almost fours years of 20%+ gains. Anecdotally, I now have a lot of friends asking me after the share market and what to invest in. Maybe I need to work on my delivery as they don’t seem like my answer. A few of them have gone off and found a stockbroker to give them the opinion they wanted to hear, i.e. get in now and use a margin loan to leverage your profits. At the moment they love telling me about their great gains and can’t believe I am less than 100% invested in the Australian market. I wish them well.

As a general rule if you hear about something on the TV news then it is time to think about selling not about buying. 

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Related posts:

1. Cycles and Waves
2. Analyzing and Valuing Acquisitive Companies
3. Energy Vs Commodities
4. Compound Annual Growth Rate – CAGR and Investing Cornerstones