There's always a bubble somewhere.
In the recent past, we've seen bubbles in gold and iron ore.
Regular Motley Fool readers should have given both a very wide berth, given we've been bearish on both for as long as I can remember.
Certainly subscribers to Motley Fool Share Advisor, the flagship stock-picking newsletter I run with Scott Phillips, should have prospered. No gold stocks, no iron ore stocks, no mining services stocks, no oil stocks, copper, uranium, or coal stocks to be seen anywhere in that service.
Avoiding commodity stocks is not rocket science — it costs a bomb to build a mine, takes forever to build a mine, costs a fortune to dig stuff out of the ground, and when all that is said and done, miners have zero pricing power.
Add in the China slowdown, confirmed once again today, and you'd be hard pressed to invent a worse type of company.
Yet Australian investors remain obsessed with the mining sector. Obsessed with finding the next Fortescue Metals Group (ASX: FMG)…
Source: Yahoo!7
Oops.
Remind me.
Haven't we just been through the mother of all mining booms? Yet Fortescue Metals Group shares have massively under-performed over the past 5 years.
The moral of the story is clear. Avoid mining stocks, with the ONLY possible exception being the majors — BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
I already own shares in BHP, and in December, revealed how I was playing their plunge below $30.
That options play ended well, with me pocketing a few hundred dollars income, thank you very much. Over the years, I've generated tens of thousands of dollars of income from selling put options on lower-risk US-quoted stocks.
But I digress, somewhat…
BHP aside, life is seriously too short to mess with mining shares… especially when there are rich pickings to be had elsewhere.
A case in point is Solomon Lew's Premier Investments Limited (ASX: PMV). Shares in the owner of the Just Jeans, Smiggle and Peter Alexander brands jumped 11% higher yesterday after delivering a strong set of half year results.
Readers of our free Motley Fool Take Stock email may remember Scott Phillips naming Premier Investments as his Top Dividend Stock for 2015.
So far so good, with Premier up 30% year to date.
For Motley Fool Share Advisor subscribers, the news is even better — yesterday Premier Investments was the latest stock recommendation to join the 100% club. The early bird, and the Motley Fool Share Advisor subscribers, catch the worm.
The Motley Fool Share Advisor 100% club is getting pretty crowded these days, but my guess is there are few complaints.
A big reason why shares in Premier Investments rose yesterday was the payment of a 9 cents per share fully franked special dividend. When coupled with their interim dividend of 21 cents, and added to last year's final dividend of 20 cents, Premier Investments' shares trade on a trailing dividend yield of 3.9% (gross 5.6%).
In these days of low interest rates, a gross dividend yield of 5.6% is not to be sneezed at. No wonder then that Australian Foundation Investment's Terry Campbell was recently quoted in The Australian as saying…
"On underlying interest rates the market is as cheap as it has ever been…"
ASX 6,000 anyone? The party hats are lined up, the champagne is on ice. With interest rates this low, and likely going lower, it really is only a matter of time.
Why stop at ASX 6,000? Unlike many other countries, the Australian market is still some way off its all time high.
Heck, even the UK market, that basket-case of an economy where interest rates are stuck at 0.5% and inflation is at close to 0%, is trading at an all time high, finally surpassing the previous record from December 31st 1999.
Ah, those were the days — the dot com boom, the Y2K bug, and the new millennium. So much hype, so much anticipation, all for nothing.
Back to today…
Overnight, US markets closed flat to down, still trading at close to their all time highs.
Greenwood Capital's Walter Todd summed the situation up best, telling Bloomberg…
"The path of least resistance is up…"
It's what low interest rates can do for the share market. By comparison to just about every other form of investment, you simply just can't beat the share market.
And I'm including investment properties. You wouldn't catch me diving into that hot market. Talk about a bubble waiting to burst! Buyer beware.
That said, blindly piling into any old hot stock is a strategy fraught with danger. Those tempted by the apparent easy money to be made trading shares in jetpack wonderstock Martin Aircraft Company Ltd (ASX: MJP) should take note.
Source: TechHive/Martin Aircraft
It looks to me like a classic case of what goes up, must come down.
The rules of investing never change.
If it looks too good to be true, it usually is.
Buy great companies run by outstanding mangers. Pay fair prices. Sit back and let the passing of time, and the miracle of compound returns do all the work for you.
Sounds easy, huh?
It can be. Ask anyone who bought Woolworths Limited (ASX: WOW) at their IPO, reinvested all dividends, and held through to today. Or Commonwealth Bank of Australia (ASX: CBA). Or CSL Limited (ASX: CSL).
But there are pitfalls. It wasn't too long ago that Myer Holdings Ltd (ASX: MYR) was the hot IPO of the day. To say that one ended in tears would be the ultimate under-statement.
Speaking of tears, not too many months ago I bought a small starter position in MMA Offshore Ltd (ASX: MRM), the company formerly known as Mermaid Marine. The shares were cheap, the dividend juicy, and the oil price had already fallen significantly.
Since I bought, MMA Offshore has cut its dividend, the oil price has stayed low, and the shares have fallen 37%.
I should have stuck with our own Motley Fool Share Advisor recommendations — I was flying solo on this one. My costly $1,500 mistake.
Never mind that after its 37% haircut, MMA Offshore now trades on a price to tangible book value of just 0.32. Or a forecast dividend yield of 11%. Or a forecast price to earnings ratio of around 4. When the tide is against you, and earnings are falling, cheap fundamentals will never save you.
On the bright side, I did take a very small position in MMA Offshore. And all is not lost, yet.
Lesson learned, I'll now watch this one very much from the sidelines, reminding myself a) not to lose money, b) not to buy mining services companies, and c) to stick with our fully vetted Motley Fool Share Advisor recommended stocks. It'll take one hell of a miracle for MMA Offshore to join the 100% club from here.
