Seven Important Things All Investors Should Know

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

By Peter Switzer, Switzer Super Report

It’s often said that a little bit of knoweldge can be a dangerous thing. Too little information can lead to inept, ill-timed investment decisions. To ensure you’re well-equipped to make the right decisions, let me tell you seven things you might not know but need to know.

1. Many seem stressed about the oil price. In fact, this has been beaten up and it’s out of proportion. The drama was captured by Brent Crude topping out at US$139.83 a barrel on 30 June 2008. It then plunged 67% to US$46.59 on January 13 this year!

But Ruchir Sharma at Morgan Stanley Investment Management Inc. put the oil story into perspective in an interview with Bloomberg.

“The price of oil is returning to normal in its long-term 100-year history,” Sharma explained. “We tend to have a short memory and we tend to forget that the price of oil breached the $50 a barrel level only a decade ago.”

OK, move on.

2. We’re really worried about BHP Billiton ((BHP)) and Rio Tinto ((RIO)), with iron prices now around US$60 a tonne. Once again, there’s a lot of short termism in this story.

The chart below explains why we’re so worried about iron ore prices and companies such as BHP and Rio because in 2011 the price was over US$180 a tonne but now it’s $63! And experts say economic gravity is still pulling it down.

However, this is what The Economist magazine pointed out on 9 September 2014:

“Indeed, the recent fall in price should be kept in perspective. A decade ago, the price for iron ore was only $20 a tonne. Even adjusting for inflation, prices are, even now, triple that level. The iron-ore boom may have come to an end, but the big miners have so far managed to remain profitable.”
 

I agree with my colleague Paul Rickard that a stock like BHP is now looking more like a dividend play and especially so with the South32 split and the ‘gifting’ of one share per BHP share.

3. There are whingers out there who think our top 200 companies paying back close to $90 billion in dividends this year is a sign that they don’t have any good investment ideas and it will hurt the companies’ future performances and bottom lines. I like the view of Paul Taylor, who oversees the Fidelity Australian Equities Fund, who pointed to academic work that shows companies that have high payout ratios invest more shrewdly than those companies that hang on to their earnings. In fact, these companies are seen as non-wasters because they have less to play around with.

Next…

4. These falling interest rates not only make dividend stocks more attractive they also raise what fair value is for our overall stock market. I pointed out on Saturday that the chief economist at Morgans Michael Knox says, on current numbers, fair value for the S&P/ASX 200 index is 6150. Right now, IG’s Chris Weston says financial markets say there’s a 90% chance of a rate cut in May, which will push fair value higher. (I don’t know why the RBA would wait but these guys and gals on the Board have been nonplussing me for years!)

5. On Saturday, I talked about how long bear markets last. There’s a bit of disagreement but Morningstar argued it’s 97 months and the S&P 500 goes up 440 points on average. Another study says 67 months. There has to be a time period difference in the studies to explain this.

The important point for me is — what’s the percentage increase of the S&P 500 in those bull markets that followed the Great Depression and World War II? As our bull market follows what the US calls the Great Recession and because monetary policy is so historically loose, I expect a longer bull market.

In the 1930s, the market gained a whopping 815.2%, while the WWII bull market put on, wait for it, 935.8%! What has the S&P 500 gone up by since 6 March 2009? Around 217% and that makes me a more relaxed bull-runner!

6. If you’re long dividend stocks and you’re looking for a stock that has the potential to deliver over 10% in a year but you don’t want to play with companies that have too many question marks over them, then you could simply play an ETF for S&P/ASX 200 index. The history of markets that have not gone through something like a bubble shows they will pass their old all-time highs. Given that our all time high was 6828.7 and we’re now at 5975, potentially that’s a 14.2% gain. Then there are dividends and, for many, franking credits as well. Even if it took two years to happen, it wouldn’t be all that heartbreaking!

7. Even if you’re late to the party chasing foreign earnings, especially in Europe, it’s still likely to be a successful investment strategy. Given a lot of market experts still think the Oz dollar will slip below the 70 US cent range, that means there could be even some decent returns in the US. However, maybe the ETF for the Russell 2000 index might be the better way to go because, with the greenback rising, companies that earn most of their income in the US should do better than those that are big export earners. Smaller US companies tend to be Uncle Sam centric.

The ETF to have a look at might be iShares Russell 2000 ETF (IRU).

Mind you, don’t feel compelled to play overseas. I think out local market still has a lot of upside. Also, be aware if the euro falls faster than our dollar, then the currency gain might not show up in the shorter term. Go into this with you eyes open. This chart from Yahoo! shows you what has happened to the Aussie-euro cross, where there has been a small downturn with the euro — but a small downturn is not a trend.
 

Remember, a trend is your friend, until it bends!
 

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.

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