How YOU can see the next iron ore crash coming

There is no shortage of ‘talking heads’ — on television, radio or in print — prepared to make financial predictions.

That’s largely because we viewers, listeners and readers love them. There’s something about the (false) certainty of a  prediction   that serves to reconfirm our own biases and expectations, while being precise enough to be convincing. 

GDP growth forecast for next year at 2.75% you say? The Australian dollar to be 89.6 US cents by Christmas? The ASX to close the year at 5,745? Such certainty, such precision.

That’s not to criticise the forecasters too much — they forecast because they’re asked, and the expert who chooses not to give a forecast runs the risk of looking ill-informed or not worth listening to.

But that doesn’t mean you should listen!

Predict – and fail

Looking like I ‘don’t know’ is a risk I’m prepared to take, mind you — trying to forecast both the fundamentals of an economy, company or commodity, as well as the market herd’s expectations of same is nothing short of a mug’s game.

And perhaps more importantly, such short-term forecasts (yes, 12 months is short term) don’t help much when it comes to investing well.

There have always been and will always be cycles. Boom to bust and back again. The ASX has delivered 28-fold gains in the last 30 years despite — not in the absence of — such cyclicality. Yes, Vanguard reports that $10,000 invested in 1984 is now worth $280,000. If you’d added regularly, you’re probably reading this from a tropical island somewhere.

No market timing, no GDP forecasts, no charts or day trading. Just time-honoured buy-and-hold investing. (No, it’s not dead, despite the headlines that come out regularly. It was probably declared dead in 1987, 1992, 2000 and 2007, too – that $280,000 is a pretty emphatic exclamation mark!)

Of course, not making predictions doesn’t absolve an investor from making responsible investments based on the opportunities and risks that confront the companies and commodities they’re considering.

Predictions are crazy, but recognising over-valuation is a totally different thing.

How so? Read on, Fool!

Iron ore plunge – who knew?

Take, for example, the seemingly unforeseen plunge in the iron ore price. Well, unforeseen if you disengaged your brain. For a few years now, the iron ore price has been trading well and truly over $100 per tonne. That was because the demand of iron ore was exceeding supply – and the profit margins were wonderful. But if you can get iron ore out of the ground for $60, $70 or $80 per tonne and sell it for upwards of $140/tonne at one point, wouldn’t you dig as fast as you could? And if you could open a new mine for that sort or price, wouldn’t you?

Yes, those questions – as any year 8 commerce student will tell you – are rhetorical. And in case you think I’m selectively using hindsight, I called an iron ore bubble just under two years ago.

Whenever the price of a commodity significantly exceeds the cost of production, it will always — always — attract competition, generating a big jump in supply and a big fall in prices. Which is exactly, and unsurprisingly, what happened with iron ore.

The only surprise is that people were surprised…

Down goes the dollar

Ditto the recent fall in the Australian dollar. The long run average for the Aussie has been around 85 US cents. In the last few years, we saw an exchange rate as high as US$1.10.


Well, there’s no accepted wisdom on all of the reasons currencies move (unless it’s someone who’s trying to convince you to trade currencies using their software… they seem to think they have all the answers), but there are a few pointers.

In the wake of the GFC, we had a AAA credit rating, among the highest interest rates in the developed world and one of the clearest ways of playing the China boom. That’s three separate (if related) tides that were all the way in – and compared to a weak and struggling US economy (and hence US dollar), the little Aussie battler was on a flyer.

5 years after the GFC, the US economy is growing, the risks of a double-dip recession have abated, the US Federal Reserve has higher rates in its sights, and the China story has more doubters than at any time in the last decade. Should it be any wonder that as those tides recede, our dollar will fall? Of course not.

Predictions will almost certainly COST you money!

Trying to make predictions is a mug’s game. But understanding the forces at play – and when they might be overwhelming and unreasonably extreme – is the responsibility of every investor. Now that the dollar and iron ore have retreated a long way from their highs, it’s much less clear where they’ll go next.

But avoiding – or taking advantage of – extremes in prices is much easier – and a salutary lesson for every investor.

Don’t YOU get caught playing THEIR game.

It’s human nature for talking heads and investors alike to feel that we need to have a view on everything. The direction of the ASX. The price of gold. The chances of success for some two-bob gold explorer.

The Foolish investor knows that’s rubbish. Your — our — only job is to find opportunities that give us an above average chance of an above average return. Do that often enough, and in time you’ll see the awesome power of compounding your money in well-chosen investments.

Invest Foolishly… and Profit

There are lots of ‘possible’ ways to make money in the stockmarket. Most of them just end up making money for those who are trying to sell you the ‘next big thing’.

Instead, there is a lot of money to be made — for you, not for those who are trying to sell you a magic formula or secret software — from keeping it simple, and not trying to look for lotto tickets or some complex trading strategy. Simple investing — great companies and good prices — almost always wins. 

A value price tag + growth + big dividends!

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