No one can really pick the best time to buy and sell shares, but this is a good strategy when it comes to the big resource giants.
As investors we all know resource giants are cyclical. That is their share prices fly high when commodity prices are booming, but then plunge when commodity prices fall. Their share prices run alongside the commodity cycle. Hence the term ‘cyclicals’.
Resource analysts constantly say you should buy these kinds of shares when they are at their lows – at the bottom of the commodity cycle – and sell when they’re at the top of the cycle. For example, an old analyst mate of mine has always told me to buy BHP shares at $40 and then sell when they get to $50 for a 25 per cent return. It’s a cycle he says has been going for years.
BHP’s share price is now at $40.
Time to act?
When we do get to the bottom of the commodity cycle, there are naturally doubts about whether it really is the bottom or there is more to fall. It is psychologically hard to pull the lever and invest.
There was a great discussion on my share investment program, The Call on the ausbiz business streaming network (www.ausbiz.com.au, SevenPlus, Samsung SmartTVs) this week with Mark Gardner from MPC Markets and Mark Moreland of Teaminvest.
A viewer requested the panel give their opinion of resources giant Rio Tinto whose share price has dropped from $137 in May to currently around $110. The reason is that Rio is a huge iron ore producer (plus aluminium, copper, diamonds and energy) and because of the slowing Chinese economy, the iron ore price has dropped to around $90 a tonne.
That’s also the reason why BHP’s share price has dropped and why our biggest pure iron ore producer Fortescue is down 40 per this year to $17 a share.
The two Marks (Gardner and Moreland) think all three companies are worth buying at these levels. In order, their preference is Fortescue, BHP and Rio.
Test the water
But their strategy is based on the realisation that no one can really pick the top or the bottom of a cycle. So they recommend putting a toe in the water first. Buy a small part of your intended allocation now and then hold off on the rest until you start to get more information.
And that information could be coming pretty soon as BHP and Fortescue report their annual results.
Also, naturally, speak to your broker or financial adviser before making a decision.
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