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Did I get too greedy on BHP Billiton?

Up, up and away.

Last week in the States, the S&P 500 closed at another record high, capping its biggest weekly gain in three months.

Remind me… wasn’t it last week the world was supposed to descend into a FINANCIAL APOCALYPSE?

Crisis averted — giving investors the green light to pile back into shares.

Strange things these markets.

It was only last week when JPMorgan Chase CEO Jamie Dimon said he was certain that the U.S. would not default, but acknowledged that the bank’s money market funds had sold most of their short-term Treasuries, just in case.

In the world of high finance, with billions of dollars at stake, “certainty” takes on a whole new definition. A better definition is “cover your back.”

No back covering this morning however, with the front page of The Australian Financial Review says…

“More buoyant $A, sharemarket gains tipped

Another 5-year high for the ASX

Yes, Foolish readers. The bull market roars on, higher and higher.

In morning trade, the benchmark S&P/ASX200 hit a peak of 5363, its highest mark since June 2008. The Age quotes Angus Gluskie, managing director at White Funds Management, as saying…

The market will continue to rally based on improving economic fundamentals and a potential delay in tapering of the Federal Reserve’s stimulus.”

Buy now, Fools, or forever hold your peace, and your term deposits.

This is Platinum Capital’s upbeat assessment of the markets…

“It would be no surprise for the markets to have some retracement, but the general improving economic tone and still massive printing of money suggests that a retreat in prices should be used as a buying opportunity.”

Nothing to fear then, hey?

Maybe we just don’t get it…

Not according to one Foolish reader who didn’t quite see it our way, sending us this somewhat cryptic message over the weekend…

“YOU GUYS DON’T UNDERSTAND WHAT’S ABOUT TO HAPPEN.”

He’s right you know? We don’t know what’s ahead.

But we’re not the only ones. For all the commentators who think they know what’s ahead — whether that be doom, gloom or something in between — the truth is the future is always unknown.

But that shouldn’t stop us following the advice of great investors like Matthew McLennan who in The Australian Financial Review said…

“We think the best way to produce real returns over the long term is to own good businesses at good prices. We love businesses that have been around for a long time. Businesses that have things that ought to make them persist — relative scale advantages, customer captivity and so forth.”

Let me think…

Woolworths (ASX: WOW)?

Telstra (ASX: TLS)?

CSL (ASX: CSL)?

BHP Billiton (ASX: BHP)?

Google (Nasdaq: GOOG)?

Google $1,000– the greatest company on earth?

You get the picture. Nothing ever is certain, but each of those companies fits the McLennan criteria — companies with sustainable competitive advantages. Yes — even Google. Charlie Munger recently said “Google has a huge new moat. In fact I’ve probably never seen such a wide moat.”

Speaking of Google, imagine my surprise when I woke up Saturday morning to find my shares in the search engine giant had jumped a whopping 14% to close above $1,000 per share — powering my SMSF to new highs. It’s what happens when your second largest holding gets a rocket up its share price.

The latest double for my SMSF

Although it feels good to have such a big winner — Google is now a double for my SMSF — I know not to get too carried away. Markets have a certain way of cutting tall poppies back to earth, just when you least expect it.

Whichever way you look at it, technology stocks are HOT right now in the States. Facebook (Nasdaq: FB) — another of my holdings — jumped 4% to $54 on Friday, in the process hitting an all-time high.

Facebook shares have more than doubled in 2013 — not bad for a stock where a little over a year ago a Barron’s columnist said the true value of the shares was $15.

Aussie investors don’t seem to have much time for U.S. stocks, and probably don’t have much time for Facebook shares either.

I can understand their reticence on the latter, as at $54, there’s not a huge margin of safety built into the share price.

The three most important words in investing

Those three words — margin of safety — are arguably the three most important words in investing. That Matthew McLennan — who The Australian Financial Review dubbed as possibly “the most influential Australian investor in the world” — follows the advice of great investors like Benjamin Graham and Warren Buffett, is no coincidence.

McLennan won’t have a bar of our banks because he says they are too risky, citing the possibility of a housing bubble.

I can see his point, especially when on the weekend my local radio station featured a real estate agent talking about investing in property via your SMSF. Needless to say, you won’t find me investing in property, inside or outside my SMSF. End of story.

Australia’s most influential investor likes gold, and gold stocks!

Interestingly, McLennan has 10% of his fund’s portfolio in gold bullion and gold equities as a protection against inflation.

McLennan’s First Eagle Investment Management fund has a substantial 8.5% holding in Australia’s largest gold miner, Newcrest Mining (ASX: NCM).

The stock, and the company, has been a total train wreck these past few years, falling from a high of $43 in 2010 down to just under $11 today — a near 75% collapse.

But you don’t make money in the stock market by looking in the rear view mirror. McLennan looks at Newcrest’s “high quality, long life assets” and its distressed share price, saying…

“If you are looking for one area of distress in world equity markets, it has to be the goldminers. The gold price has retraced two or three years; goldminers have retraced a decade. So not only is there a potential inflationary hedge angle for investing, there is also a value element as well.”

Or in other words, especially as Newcrest shares trade below book value, McLennan obviously sees a margin of safety in the stock.

It’s not an investment without risk. Our own Mike King said about Newcrest…

“Management have consistently let investors down with overly optimistic production forecasts, and somehow seem to manage to shoot themselves in the foot year after year. Plus, they have a chunk of debt, which adds another level of risk. A gold stock trading below book value is hardly unique — of the 13 gold stocks I’m watching, eight of them are trading at less than book value.”

3 cheap gold stocks… for your consideration

Mike’s three favourite gold stocks today are Silver Lake Resources (ASX: SLR)Northern Star Resources (ASX: NST) and Kingsgate Consolidated (ASX: KCN). In the immortal words of Charlie Munger, I have nothing to add. Needless to say, they are not official Motley Fool recommendations.

McLennan says he can never predict which of his stocks is going to work best. It’s why he doesn’t have all his eggs in one basket of gold stocks, why he does have a diversified portfolio, and therefore why he canbuy a decent chunk of Newcrest, complete with warts and all, and sleep well at night.

Did I get too greedy on BHP Billiton?

Sticking with the mining sector, tomorrow BHP Billiton releases its Q1 FY14 production report. Bell Potter’s Charlie Aitken is “thumping the table“, saying tomorrow should be the trigger for consensus upgrades to BHP’s earnings.

He might be right, especially with the continued strength in the iron ore price, in which case, BHP’s shares could be on the up.

BHP never did fall below my stated $30 buy price.

In June this year I could have bought more BHP for $31, and be sitting on a nice 16% profit. But I didn’t, my stubborn insistence on a margin of safety holding me back. The theory is great, but sometimes you’ve just got to back your judgement, pay a little more, and take the plunge.

Still, at least my family’s current BHP holding has grown that bit bigger…

The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get 3 Stocks for the Great Dividend Boom in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading

Of the companies mentioned above, Bruce Jackson has an interest in Google, Facebook, Woolworths, Telstra and BHP Billiton.

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