Are resource stocks a bad choice?
The question that’s been rolling around in my head for the past week is whether or not I have made an investment mistake in my long-term portfolio with regards to resource stocks. The mistake could be that I hold two in the long-term portfolio.
But first let’s step back. I have long said that single commodity resource stocks are basically trading stocks. When the commodity they mine starts a long-term uptrend then I will consider a buying position for the best miners in that commodity space. I only buy the best and only when we have clear evidence that the commodity price is on the up. I then hold for as long as the commodity remains robust, potentially a number of years.
For example, I held both Kumba and Impala Platinum from around 2004, exiting in 2008. In reality this is trading, not long-term buy and hold, but the strategy has worked well for me.
In my long-term portfolio I have two resource stocks: BHP Billiton* and Sasol*, and I have always had a reason as to why they are different to other single commodity miners.
The case for Sasol is simple, the world runs on oil, after water it is the most important commodity that we need in order to sustain our current way of living. I have argued that while oil may bounce around somewhat, the longer-term trend is that demand is growing and will continue to grow and this is good for Sasol. This may all be true, but even more true is that the oil price is volatile and has traded in an admittedly wide range for much of the last decade or more.
This is the big issue w it h commodities ( be t hey oil, wheat, platinum, etc.), as demand increases so does price and that is followed by supply increases driving price down. My first Sasol purchase was back in the early 1990s and the return has been excellent, and the dividends even better. But looking at more recent returns we see Sasol (excluding dividends) has given us 5% over three years, 41% over five years and 169% over 10 years – hardly setting the world alight, albeit dividends do add to those numbers a bunch but still well behind the Top 40.
This is an important fact: I always say that i f you are not beating the market then you should stop trying and just buy the market via an exchange traded fund (ETF).
So, in trying to defend my holding of Sasol I have a look at the Brent oil price. Sure, a great-looking chart as it was around $20 a barrel when I first bought Sasol and it has been above $100 in 2008, and again for the last many years (obviously now falling sharply).
The bigger question is if oil is also pretty much range bound, and the answer seems to be yes with a long-term range of around $50-$110. Couple that with rising costs and all that really saves Sasol is a weaker rand and there are better ways to get exposure to that. The issue is if oil hits $200, surely we’ll see production ramp up as with any other commodity ultimately pushing it down again.
So what do I do? Firstly, I take some relief from the JSE index committee decision that Sasol is an industrial c hemical company r at her t han a resource stock, but that’s not really the answer. So I mull it over, think about it a lot and do nothing in a hurry – no knee-jerk responses. Over the next few months I will eventually come to a decision and let readers know what I have decided (and also update on BHP Billiton), but my gut says I could have been wrong.
I ALWAYS SAY THAT IF YOU ARE NOT BEATING THE MARKET THEN YOU SHOULD STOP TRYING AND JUST BUY THE MARKET VIA AN EXCHANGE TRADED FUND (ETF).