A lot of value investors talk about how you have to look for the unloved, the obscure, the boring and the small. That’s fine if you want to invest in those sorts of companies but personally, I sleep better when I’m invested in big, well known, highly profitable businesses and fortunately these can be value investments too.
For example…
Take BHP Billiton (LON:BLT). It’s the world’s largest mining company, a member of the FTSE 100 and is known and followed by droves of equity analysts. On top of that, commodities are a hot topic at the moment so it isn’t exactly out of fashion, obscure or small (its market cap is more than forty billion pounds).
Despite this, its shares have what all shares have – volatility. If you bought shares in BHP at the start of 2007 they would have cost around 930p. By mid-2008, only 18 months later, you could have sold them for anything up to 2,000p for a 100% plus gain.
Of course, I’m not saying that anybody actually made that trade, but it was possible. In fact it could have been done again by buying below 1,000p in late 2008 and selling again over 2,000p in early 2010. That’s two periods of 100% gains in a few short years with a company that the best analysts in the business are looking at all day long. It doesn’t say much for the predictive powers of the market does it?
A short sighted approach leads to a bumpy ride
A major factor in this volatility is that most analysts are only looking at the next year, and sometimes less than that. It’s like trying to drive by looking at the road immediately in front of the bonnet. You’d end up weaving all over the place because you can’t see what’s coming and every time there’s a bend in the road you’d overreact in a panic because you didn’t see it coming. That’s pretty much how the market seems to work.
I prefer to look down the road as far as I can and to do that I need to have a clear view. In terms of investing, a clear view means starting with a company that is more predictable than most.
Can BHP help me to beat a simple index tracker?
With BHP Billiton I have a company which is…
