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The biggest prize in investing

One thing I won’t be doing this evening is watching The Budget.

You might think that odd coming from someone who is in the business of picking winning stocks.

After all, in theory I should be on top of any changes to corporate tax rates, to the superannuation rules, to the carbon tax and whatever else the government of the day decides to tinker with.

If ever there was a politically motivated budget, this is it. And like most of the rest of the country, I’ve had it with politics, and politicians.

And besides, all the big policy announcements have already been revealed. The Budget speech and reply are simply acts of political drama, starring Swannie and Big Joe Hockey. If it’s drama you’re looking for, I suggest watching Celebrity Splash or The Biggest Loser — they’ll be less cringeworthy than The Budget, guaranteed.

One REALLY BIG loser

Speaking of The Biggest Loser, did you see the massive profit warning yesterday from mining services company Coffey International (ASX: COF)?

These days it’s only a small company, the shares trading around 11 cents. But in early 2007, the shares were riding high at close to $5. That’s some haircut — around 98% to be more precise.

Motley Fool analyst, Scott Phillips, has long advised members to steer clear of mining services companies. Scott has long suspected the mining boom simply couldn’t last.

Mining is a cyclical business, prone to boom and bust.

Boom-time is NOT the time to buy such stocks…even BHP Billiton (ASX: BHP) has not been immune, slumping from $48 in 2011 to $34 today. It’s not a Coffey-like haircut, but a fall of close to 30% in Australia’s largest company over the past year-and-a-bit is still painful.

Scott has also consistently stated that when (not if) the mining work slows down, the mining services sector will be left with an abundance of over-capacity in terms of personnel and equipment. And given some companies leveraged up to add expensive equipment to their balance sheets during the boom, the fall-out for some could be terminal.

The biggest prize in investing…even Warren Buffett agrees

You rarely get any prizes in investing for not making mistakes.

But avoiding losers should absolutely be your number one goal as an investor. Even Warren Buffett agrees, stating the number one rule of investing is not to lose money. The number two rule is not to forget number one.

Sometime I wish I’d taken better heed of that advice myself. I’ve had the odd howler or two. The worst part about it is they were risks I didn’t need to take. I’ve still got one dog in my portfolio as a reminder of the pain, and also as a reminder not to take the same risks again.

Although you may not sympathise — especially as stock picking is what we do here at The Motley Fool — I suspect the scenario will resonate with many readers.

The exciting ride that ended in total disaster

Tell me, dear Foolish reader, is this a familiar story?

What started out as an exciting yet speculative ride on some penny stock mining company has turned into a near-total wipeout.

You’ve had opportunities, and reason, to sell out on the way down, but grimly and stubbornly hung on, hoping against all hope that something — anything — will happen to send the stock soaring back to your original buy price, at which time you’ll sell out and move on.

Such stories almost always end badly. The shares almost never get back to your buy price. One day, a few years down the track, you finally give up and sell out, pocketing a few hundred dollars from your initial multi-thousand dollar investment.

And then, after a suitable period of mourning and reflection, and after the market has had a good run, you go and do it all again.

I’d contend we all need a Scott Phillips to tap us on the shoulder just as we’re about to hit the CommSec buy button…

“Bruce, don’t do it. Take a look at Harvey Norman (ASX: HVN) instead. Their property holdings place a very solid floor under the share price, and the Australian consumer will start shopping again. The downside risk is minimal yet the upside risk is substantial.”

I have a confession to make…

I was nervous when, a little over a year ago, Scott made the bold call to Buy Harvey Norman, Buy.

It was a controversial call. Feedback at the time was almost all universally negative…

“Thanks. Is this a short sell tip?”

“GET STUFFED”

“What would appear to be a declining trend in a business faced with constant deflationary price pressure, even in their best years, becomes a cascade of operating de-leverage on ALL FRONTS with no respite. And 5.5% as a yield is just not enough safety margin to provide buffering in event of further material declines.”

Truth be told, I too thought Harvey Norman would struggle to recover…in the face of a slowing economy, rising unemployment and internet shopping.

But Scott was right. The naysayers, including me, were wrong.

The timing on the call wasn’t absolutely perfect, and the shares did essentially nothing for the ensuing 9 months. That’s okay — we reckon the only people who can accurately pick the absolute tops and bottoms are lucky…or liars. That’s why we focus on the business, and invest for the long term.

Today, Scott is having the last laugh. Including dividends, Harvey Norman shares have risen over 50% since his bold call. I tip my Foolish cap to Scott.

Today, stating the obvious, Scott says Harvey Norman is nowhere near as undervalued as it was, but he does think sales and profits should continue to grow which should have a positive impact on the share price.

Unlike the horror penny stock stories littering the portfolios of Australian investors, the Harvey Norman story looks to still have legs.

“Nasty downturn” alert

I wanted to close with some quotes from the Coffey International managing director John Douglas.

In The Australian Financial Review, Douglas warned Australia is on the verge of a “nasty downturn”, saying they were “seeing a much sharper contraction of the Australian economy than we’d anticipated four or five months ago.”

What was that about the mining boom being over?

That, the still strong but now falling Australian dollar, and low but likely to fall lower interest rates are of much greater interest to stock pickers than The Budget.

Life is too short to listen to politicians, more so when there’s some serious stock picking to be done.

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More reading

Bruce Jackson has an interest in BHP Billiton. Take Stock is 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). Authorised by Bruce Jackson.

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