If "renowned China economist" Andy Xie is correct, the share prices of Australia's two mining behemoths — BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) — could be in for a rude awakening in the latter part of 2013.
According to The Australian Financial Review, Mr Xie, a former Morgan Stanley chief Asia economist, forecasts the price for iron ore will plunge to $US60 a tonne from $US150 a tonne.
Iron ore accounts for about 80% of Rio Tinto's earnings and about 50% of BHP's earnings.
Make no mistake. If the price of iron slumps to $US60 a tonne, the share price of Rio and BHP will almost certainly follow it down, in the process dragging down the whole of the ASX.
That day of reckoning for the ASX is clearly not today, the S&P/ASX 200 trading back close to 5100, lead once more by the big four banks and the big two supermarkets.
Source: Fairfax
Here at The Motley Fool, we don't do 'doom and gloom'. We subscribe to the Warren Buffett long-term school of investing — reiterated again just this last weekend in his latest letter to shareholders of Berkshire Hathaway…
"… investors and managers are in a game that is heavily stacked in their favor…Since the basic game (of investing) is so favorable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of 'experts,' or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it."
Andy Xie just could be one of those 'experts' Buffett is referring to above, someone who is just as likely to get it wrong as right.
Frankly, Mr Xie is guessing.
The only reason why he's made it to the front page of the AFR is because he's made the bold, outrageous prediction that the price of Australia's biggest export commodity will plunge by a massive 60%. Predicting a 10% fall doesn't get you the girl.
The death of the mining tax
On the bright side, at least Gina Rinehart and Andrew Forrest won't have to worry too much about the mining tax.
Speaking of Andrew Forrest, chairman of Fortescue Metals Group (ASX: FMG), if you think BHP and Rio might have problems with $US60 iron ore, Mr Xie says…
"I think a lot of shareholders in these highly leveraged miners will lose everything — in the end, creditors will take over these projects."
The AFR reports Fortescue has the greatest debt burden of its iron peer and has recently increased loans to fund expansion.
Walk away, Fool
You may have spotted Motley Fool Share Advisor analyst Scott Phillips last night on the ABC's The Business, talking stocks with Ticky Fullerton. Or perhaps on the Market Moves segment on Sky Business News. He's an in-demand Fool…
Scott doesn't need predictions of US$60 iron ore to tell him to steer clear of the notoriously cyclical sector. If he can't reasonably predict the future demand or supply for something — especially a commodity like iron ore — he simply walks away.
There are no penalties in the investing game for missing out on the next big winner.
Heck, I myself missed out on buying Fortescue at 25 cents in 2005, as I suspect did over 99% of readers on this edition of Take Stock.
But where you do get penalised, heavily, is by losing money on some hot stock tip, or just some plain bad advice.
Investors who bought Fortescue at over $12 in 2008 probably know what I'm talking out.
Don't lose money
Warren Buffett only has two investing rules…
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1
Judging by the email we recently received, unfortunately it seems not everyone subscribes to Buffett's rules…
"I have been a Motley Fool Share Advisor member since the beginning and am very grateful for the recommendations. Over the past 10 years I have subscribed to a number of share advisor subscriptions and every single one has lost me money. Thanks to you I now understand how to value companies and have made a fair chunk of my losses back."
We're glad to be of assistance.
Forbes today named Buffett as the 4th richest person in the world, having amassed a fortune of $US53.5 billion over a long and distinguished investing career. When he talks investing, it pays to listen.
Overnight in the US, the Dow climbed to a 5-year high. No concerns over there about a slowdown in Chinese economic expansion, nor that the iron ore price may tumble…
With interest rates so low, and few other places where savers can earn a decent return, is it a case of selective hearing?
Or placing one's head in the sand, and hoping?
How the easy money is made
As to where the market goes from here, you won't get any predictions from this Fool, especially of the type I read in today's AFR, with one trader describing the S&P/ASX 200 index…
"…as being in a congestion sideways triangle, in a phase with a 4980 downside. If the market should break below this, his technical call is an ultimate target of 4800."
I guess today's not his day.
Tomorrow's not looking good either, especially given less than 1% of day traders are able to consistently beat their benchmarks.
Who'd be a trader, when there's easy money to be made by doing absolutely nothing?
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Until next time, as ever, we wish you happy, and profitable investing.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Motley Fool General Manager Bruce Jackson has an interest in BHP Billiton and Berkshire Hathaway.
