Since the election on November 8, 2016 the metal and mining sector has been on fire with prices for copper up over 20%. Anything related to natural resources has done well. But haven’t we seen thinks like this before, and for much better fundamental reasons than a pro-business president-elect?
One guy I like to read is Jim parker. He works for Dimensional Fund Advisors and lives in Australia. While he writes timely pieces, I think his insights are best taken years after he wrote them. So, I’m going to paraphrase a piece he wrote back in May of 2010. The original piece was for professionals only for some compliance reason. Let’s just say that whatever I write below is not a solicitation to buy or sell some particular stock.
I wasn't aware that you finished cut diamonds came out of the ground via a pickaxe. . .
Here is the illustration in The Australian Financial Review clearly showing the public that if you are not in mining stocks you are crazy. Here is the link. Can’t you see there is money just waiting to be dug out of the ground? I’ve been reading about this for around four thousand years. If you want a history of trade that focuses on taking things from the earth, including people, check out The Silk Road by Peter Frankopan. I actually read this whole book and it explains a lot about what is going on today.
Getting back to mining, the newspaper cited extraordinary demand from China for raw materials. On top of that, the 100 best performing mining stocks had made an average gain of 33% over the last 5 years. That was 33% per year for 5 years. Okay, get me some of that.
Jim goes on to talk about the then shocking news that the Australian government announced, the day after this glowing review no less, a major tax reform that would levy a 40% tax on mining companies. At the time some so-called experts prognosticated a drop in earnings of around 20%. This isn’t shocking. If you tax more of the profits, there will be less profits. No experts needed.
In the end we all know there is much more to global raw materials than one countries tax regime. Global growth was called into question as Europe’s debt crisis was starting to heat up.
At the time we all agreed, it seemed, that there was some type of commodity super cycle underway, but you can’t bet all your money on a non-diversified sector specific call. It’s like taking all your money today and putting in on Texas Tea just because the Republicans will control the government and they all love oil. There is more to it, like the overlooked concept of supply and demand.
What we do at Portfolio Wealth Advisors is break down equity and bond portfolios not into mining stocks or banking stocks, but into broad asset class categories where the risk is related to an expected return. By stepping back a few feet from the minutia of individual stocks we can see more clearly how capital grows.
This means a portfolio of large stocks, small stocks, value stocks, international and merging market stocks. The mix is driven by our client’s goals, not a risk questionnaire or storytelling.
If you have large cap stocks, believe me you will see BHP and Rio Tinto in your portfolio. Just don’t let an advisor build a portfolio around a clever story about the mining industry or its prospects.
The bottom line is successful investing is not only about capturing risks and off an expected return, but reducing risks that don’t. Don’t limit your exposure to random forces or be tempted with a stock tout who bases an investment strategy on an economic forecast.
So, what happened to BHP, the largest of the group back in May of 2010? The chart below says it all. While nobody wanted to be holding emerging markets during this period, a diversified basket of stocks with serious headwinds did much better during the commodity bust than the illustrious 800 pound gorilla that so many had high hopes for.