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, its a good investment. If it wont, it isnt.
All sorts of nonsense is talked about these companies
A lot of people analyse the charts, see the share price has fallen a lot, and then say that thefirm is a contrarian buy. Im 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 companyprofits are tumbling as well. To me its 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 were producing more than weve ever done before. This excess of supply inevitably meanslower prices.
Never be out of sync with a cyclical share
The share prices of BP and BHP Billiton are also trending remorselessly downwards. BHPs share price reached 2,300p in 2010. Its 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 wouldnt 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 expectthem to fall even further. Energy prices, whether youre 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.
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Prabhat Sakya owns shares in EasyJet. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.