I’m Not Waiting For Santa

By Peter Switzer, Switzer Super Report

I’d like Santa to come calling for Christmas but I’m not fussed either way because I know in the fullness of time my chickens will come home to roost.

That said I nearly fell for the same mistake too many investors fall for — short-termism.

Let me explain myself by telling you my BHP story.

You see I bought BHP at $20 the week before last and as a consequence, was annoyed that I missed $18.77 on Friday and today’s $18.30 but then I pulled myself back from investor naivety, thanks to a history of studying of how you build wealth.

The lessons are quite simple, like most good money-making plans:

1. You buy quality assets
2. Don’t be over-exposed to too few assets — spread your risk
3. You buy them when they are cheap
4. You enjoy a stream of income and eventually capital gain
5. It’s nice to buy low and sell high but timing stock markets is fraught with danger.
6. You never go broke taking profit.

There’s also a lesson from a chart that could initially lead to a bit of concern and it shows what has happened to BHP’s share price since the mid-1980s.
 

Anyone thinking that BHP under $18 is unthinkable might be shocked by this chart, as it was around $2 before 1990. By 1997 it was $7 but slipped to just over $5 before 2000. However it then scaled up to the mid-$40 region thanks to the China-boom and now has tailed off to sub-$20.

Anyone shocked at the $2 share price must accept that it did spike to $7, which where I come from is a 250% gain. Then in the mid 2000s its share price went from around $6 to $45, which is a 650% gain. Sure the company benefited from China’s double-digit economic growth but it changed as a company, dumping steel production and becoming a diversified miner leveraged to a global economic recovery that also ratchets up commodity prices.

If you think the Fed, Mario Draghi at the European Central Bank, the Japanese and the mob in Beijing eventually do enough to push up global economic growth, then you can believe that the likes of BHP will see its share price rise.

Meanwhile at the same time you should collect over an 8% dividend before tax credits. And even if it was cut after a year, you probably still will get a pre-tax 5% dividend and so you have to think this company is a great to good dividend play, at least for the moment.

The chief economist at Morgans, David Knox, thinks commodities will improve over 2016 as the greenback eases and the euro starts to pick up. Using what he calls standard deviation analysis, which most normal people scratch their head over, he says it tells him that the euro’s slide is close to its end-play. When this happens, it U-turns against the US dollar and this helps commodity prices rise purely on a lower valued greenback.

If we add this to hopefully a stronger world economy, if not in 2016 then in 2017, then companies that supply global growth such as BHP should be beneficiaries.

If you bought BHP at $20, you only need to see it get to $22 for a 10% capital gain plus you have to add in the dividend, so we could be talking 20% in a year or 20% over two years if the recovery is slower than I’m thinking.

Either way, provided you buy quality companies when their share price is low and you are a long-term investor, who likes dividends, then you can do OK investing in shares.

“The only thing to fear,” as Franklin D. Roosevelt once advised, “is fear itself”. However I would add in not understanding the rules for building wealth and being spooked by short-termism as other things to worry about.

I’d like to see a Santa Claus rally where it should be — before Christmas — but if a Fed decision or something else delays Santa’s arrival, he will show up in 2016 some time and I will be poised to benefit and I hope you will be as well!
 

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms