ASX Shares BHP Billiton

I could think of over ten that are still standing and going even stronger on the top50 ASX alone,look up charts for CBA - BOQ,or Blackmores---I was talking to a gentleman yesterday I see him several times a year at various companies AGM'S within Australia he retired on CBA alone,and sold BHP at above 35 bucks and with the lower and still can go lower entry cost levels from what he told me yesterday with his entry level he would be a unit holder again late yesterday,with BHP imho it's not a fast bucks turnaround the dart will stay in the air for a while till it hits the bulleye..imho..

 

Key term here is Pricing power. Basically, how inelastic is the demand. I present you a couple of options ;

- Iron ore, or say LNG.
- Apple iphones or say Marlboro cigarettes.

Iron ore or LNG is easily substitutable ; it doesn't matter whether bought from BHP, Vale, Chevron or Total. Its all the same. The buyers of these products are not swayed by brand.

The latter examples display significant demand inelasticity because consumers want these things - they will pay extra for them compared to their competitors products. Consumer discretionary and consumer staples are full of these examples.

The only recognised sustainable competitive advantage that BHP has is it is a low cost producer. Other businesses, in other industries also have this and have competitive advantage through brand power, network effect, switching cost to name a few. This leads to reliable, sustainable cash flows, something that doesn't exist in basic materials.

Well utilities are heavily regulated in developed countries, so you can count that out.

I'd say about 5% of ASX listed stocks are viable as long term holds. In the basic materials space I think only BHP has any place in a long term portfolio, and a 5% weight at that. A look at the major LIC's top 20 will show a lot of common positions, there should be no surprise in that. Even better, Morningstar's Equity Income model portfolio would be a cracking starting point for someone to mimic.....they have smashed it since 2001 with very low portfolio turnover, holding only moat rated stocks, and not selling. Any idiot can follow this and outperform. (XJO accum. 7.8% vs 12% model portfolio). Key is stock selection. I think the danger in stocks is always trying to shoot the lights out. Whats wrong with 10% total return....compounding is the key, and if managing direct stocks, you need 20 or so positions built for the long run. But the punters get excited and go overweight on the latest story stock and get blown up.........SGH a great example this week for those who bought into this roll up "growth stock"!

my problem with basic materials is that due to the cyclicality of earnings, the time that these businesses are flush with cash, and asset prices are highest coincide. They have a habit for overpaying for assets thinking that the good days will last forever, and three years later they are back in the poor house. RIO is a case in point on this. BHP has not been so bad, and I think its progressive dividend policy has protected shareholder interests.

I guess my view is, there are lots of businesses on the ASX. Question why you need materials in your portfolio. Because they are there, and because they are big names and you take comfort from them isn't a valid reason. My thinking on this has come around a lot in the last 6 months, Thornhill with his industrials mantra was right all along...cant beat experience.

 

Well you don't, in fact, as a resources based specialist investor myself, I would reccommend that unless people know a thing about mining, or are using a broker that specialises in that area, they should stay well away from resources sector altogether until it moves into commodity price upward cycle, which it very much IS NOT and won't be for a long time.

Yeah I've been watching this for the last week. Shocking how many mums and dads got sucked into this previously by terrible (self-serving) analysis from instos. Debt covenants will be breached...bye bye SGH as you know it.

 

Good post.

I hate these "growth" stocks based on roll up model funded by piles of debt.......punters need to understand the concept of agency risk - the C levels interests are not the same as yours! And when they blow, they blow up big time........

 

On this, I would agree that this is best for most investors. However, for myself personally, I subscribe to Warren Buffet's philosophy which is contained in his comment “Diversification is protection against ignorance, it makes little sense for those who know what they’re doing.”

 

But yet Wazza has what 20 operating subsidiaries and 50 or so positions in his listed portfolio

Munger is the super concentrated guy, but he is super brilliant.

 

Yeah but that's because the stingy bugger hardly ever sells

I doubt anyone is more concentrated that me...only two core stocks atm

 

Love the discussion guys, thanks!

 

I was going to respond but the Falcon beat me to it and did a much better job.

Yes - it's not about being true price makers or anything, it's about having sustainable earnings, and earnings which can grow over time... regardless of cycles in things as wildly volatile as commodity prices.

Recently BHP has been terrible on the sharemarket, yes. But even over the last decade or so it has been a below average performer. If that's what it does during the biggest mining boom likely ever to be repeated in our lifetimes, I can't help but imagine how badly it will perform over the long term.

Im no expert, but for my money unless you have specialised knowledge, you just don't need to be in the resources space. So many people buy it anyway though, since it's the "big australian" and they know it.

But I admit I have a personal bone to pick with BHP in particular. My parents have thought it "looked cheap" and kept buying it on the way down, and I've been telling them for two years now to stop, it will go lower, etc. And their stock broker keeps recommending it, thinking its "good long term value" every time. And I'm so angry with the stockbroker for doing this. But I know they're not alone. It really astounds me the amount of people who are willing to do this.

I personally would love to see it perform better for the reasons above. But long term, I can't imagine why you would do yourself the disservice of owning the stock directly (you can't avoid it if you have an index fund or any sort of Australian fund that is index aware).

 

I am not, nor have ever been a fan of BHP. I'm all for paying dividends, but they were paying way to much. A resource company needs to strike a fine balance between returning shareholder funds and company growth. IMO BHP did not retain enough during the mining boom to funnel into growth by acquisition, and when they did acquire something, they way overpaid. And now, during a resources slump when their are several high quality and still high margin projects that could be snapped up for a bargain, BHP can't do anything but keep their hands in their pockets (& decrease their divvy).

Sure but commodity price cycles tend to be quite protracted so you can invest in resources over a relatively significant time frame. If there is an upward trend in commodity prices, then imo a general non-specialised average risk investor should be investing some of a portfolio in the resources sector rather than completely excluding it. Compare the BHPs etc during the mining boom (2001 - 2010) to the non resource blue chips.

 

Thanks for the posts, you give a well reasoned approach

I agree, that's a solid approach. However the bold part is the big if, and brings up a few problems for me. This rise in price trend we're talking about:
a) isn't happening at the moment
b) doesn't look like there's going to be a repeat of the mining boom for a very, very long time
c) ...no one can really predict when these prices will start rising again! The miners themselves don't know

which brings me to my overall approach of just throwing these stocks in the too hard basket. They tend to become range bound for a long time, many resource stocks. In my opinion it's the realm of day traders, or people with specialised knowledge.

However the average joe doesn't think that way, they know that certain mining stocks can make you incredibly rich. They see the returns on things like FMG in the early days and get greedy. But if people were content with more stable, but more repeatable returns, I think they'd do much better. Much like the Falcon's post above - what's wrong with 10 odd percent a year? That's a fantastic return, in a low growth world

 

Yes, yes. Industrials and dividends, my idea of investing heaven. Of course we do have exposure to the large resource stocks via the major LICs which isn't ideal but that is the price we pay to gain access to the other benefits of the likes of AFIC and ARG etc. Do hold WHF however for pure industrial exposure but due to its size wouldn't put everything into it.

From memory during a discussion with Peter Thornhill quite some time ago I think he holds a core of LICs (ARG, AFI, MLT and WHF), IMLs Small Companies Fund (he and Anton T. were work colleagues at Perpetual) and around 50 direct Industrial Shares. When I mentioned the issue of his major LICs holding BHP, RIO etc he said yes it is unfortunate that they are weighed down by this "lead in the saddlebags". But one has to be pragmatic and his direct holdings significantly dilute the weighting of Resource stocks held by the LICs.

The index fund we hold, VAS, also exposes us to resource stocks but at least with the index over time out goes the bad in comes the good and poorer performers get shuffled down the list. And when major LICs are expensive it is a price one pays by having a bit of extra exposure to resources to get into a cheap listed diversified index fund when the market takes a dive. Again pragmatism rather than perfection.

Unlike the SMSF which is all LICs and ETFs, the Family Trust holds ARGO as a core but mostly direct Industrial holdings of the usual suspects such as the 4 Banks, MQG, Retailers and TLS ... etc. Awhile back it was about getting some diversification away from the Top 20 but with industrial mid-caps now becoming flavour of the month and expensive it has been time for us to head back to the majors whilst they are depressed. As a very long term investor the likes of ANZ, NAB and even WOW (yes despite its issues) were just too tempting during the recent dip so couldn't resist topping up. And as an investor, not a trader, will grab more of these and other Industrials if the market tanks. Worked like a charm for us during the GFC and unless you think over the longer term Australia has no economic future at all which I don't ascribe to then it's what we will continue to do, ie buy in gloom. Funny how people in general can't resist a bargain when doing their everyday shopping but when it comes to the sharemarket the herd are scared off when amazing bargains (ie future income streams at a hell of a discount) are on offer!

 

Yep, that's pretty much as I said in my earlier post, that people should avoid resources stocks atm unless like me they know what they are doing.

Nothing wrong with that, if that's what your comfortable with regarding your risk profile. Very easy to achieve...heck I've been getting more than that on my two IPs for the last 15 years.

 

Great stuff Austini. Readers here are blessed to have your comments -
Someone who has walked the
Talk over the long term.

Happy to buy you a steak and share a
Bottle of shiraz anytime you are in the CBD. PM me

 

Thanks Falcon. However you give me way more credit than I deserve. Based on your posts I think your knowledge of investing way surpasses mine.

I have made lots of investing mistakes over the years (and still do occasionally) plus I would not consider myself to be much of a stock picker but have learnt a few simple rules including: focus on shares for their income (it's dramatically less volatile than capital); diversify using low fee quality listed funds (let others way better than me do the stock picking); with direct shares stick to the "no brainers"; be willing to buy these when the market tanks and fear is through the roof (not always easy to do); and finally hold for the long term.

This could have been learnt in five minutes but as a slow learner this seems to had taken me an awfully long time to figure out:-( For some of us no matter what we are told by experienced others when younger we seem intent on needlessly making the same mistakes before coming to our senses! I think at the heart of the problem is wanting to get rich quick. The above approach that I follow is the slower more conservative investing for income. Investing and/or trading purely for capital gains has caused me more grief than the income approach but others have been successful with it. As always it's horses for courses!

 

Samarco (the JV entity between BHP and Vale) is allegedly being sued by the Brazilian government for $7 billion.

Share price could get hammered again on Monday.

I too agree that the progressive dividend policy is a mistake. Have to manage the company for the environment it operates in. Blindly raising dividends when your profits are returning to pre-boom levels is plain dumb.

 

Well that's great. If you can do it every year over the very long term, for the average joe that's a good return in a low growth environment IMO. Most people won't get this return year in year out, they will blow it. Or the cycle will change.

And the average person who as been buying BHP recently most certainly hasn't been getting ten percent a year. I think the average super fund has gotten around 7.1% over the last five years). Which, if you compare it to the MSCI world index, is very low. These super funds would have done much, much better if they'd diversified internationally away from ASX and all it's cyclical miners.

 

Many people, who are into the shares game on this forum, seem to be good at identifying stocks which are/going to be in danger. But they don't seem to say "yeah.. Stock XYZ is a good one to buy".

 

@Aaron Sice summed that up nicely in the SMSF thread recently. That's why he shorts stocks more so than goes long. It's easier to predict the SP on bad news than hoping for unexpected good news.

pinkboy

 

The majority of funds have investment options that include industrial only and overseas equity funds. Not defending super funds, I worked for one for over 10 years and think they are terrible. But imo, the rate of investment returns generally are attributable to the member or their financial adviser and the choices they make...or in many cases their employer who chooses the default fund (assuming member doesn't exercise choice).