Successful investing often appears to be akin to black magic or sophistry. There are so many techniques you can use, from chartism and Bollinger bands to contrarianism and momentum investing.
Which technique works best? Erm, your guess is as good as mine. In general, I have only one single rule to determine whether I will buy into a company.
In simple terms, will the profitability of the firm increase or decrease over the next three years? If it will, it’s a good investment. If it won’t, it isn’t.
All sorts of nonsense is talked about these companies
When discussing the merits of buying shares in oil and mining companies such as BP (LSE: BP) and BHP Billiton (LSE: BLT), I hear all sorts of nonsense talked about these businesses.
A lot of people analyse the charts, see the share price has fallen a lot, and then say that the firm is a contrarian buy. I’m afraid this is just plain wrong.
The oil price is crashing through the floor. Metal and minerals prices are crashing through the floor. So commodity company profits are tumbling as well. To me it’s obvious this is no short term blip. This is a long term trend as the commodity supercycle draws to a close and we have a bear market in these raw materials.
The oil and minerals boom of the past decade has also caused a boom in exploration and production investment. This has meant that we’re producing more than we’ve ever done before. This excess of supply inevitably means lower prices.
Never be out of sync with a cyclical share
The share prices of BP and BHP Billiton are also trending remorselessly downwards. BHP’s share price reached 2,300p in 2010. It’s now down to 694p. And I think the falls will continue, as the momentum is building.
The most dangerous thing is to be out of sync with a cyclical share. If you are, you should bail out now. And I wouldn’t even consider buying into BP, BHP Billiton, or any other commodities stock.
Instead, focus on the positive: petrol prices are already down to £1 a litre. Over the next few years I expect them to fall even further. Energy prices, whether you’re talking electricity or gas, are also starting to fall. Again, you should expect a lot more decreases in the future. Consumers will have more money in their pockets, which will mean a boost to consumer goods and retail firms.
Share prices traditionally do well in commodity bear markets. I expect this occasion to be no different. So buy Marks & Spencer, Reckitt Benckiser and EasyJet, and sell BP and BHP Billiton.
Trends such as these are unstoppable forces. Never bet against them.