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Bluechip Checkup: Is CSL Limited Still Better Than BHP Billiton Limited?

It’s always tough for me to hear my grandparents talk about their investments in “blue chip” shares such as BHP Billiton Limited (ASX: BHP).

Of course, that’s hardly surprising seeings half the investment industry seems to have a penchant for talking up the company, despite exceedingly average long-term returns and an uncertain future.

What niggles me, though, is that my grandparents ignored my article — back in 2014 — that explained why “I’d definitely choose CSL Limited (ASX: CSL) over BHP.”

As you can see from the chart below, CSL is up 50% since I wrote that article, while BHP is down 50%.

Screen Shot 2015-12-29 at 9.07.06 am

Of course, things have changed, now: the risk/reward for BHP is more attractive, since its share price halved.

But I’m still blown away by the fact that so many Australians own shares in mining companies despite the fact that long term returns from the sector are poor. Worse still, very few of the shareholders (or the financial advisors who encourage them) actually understand what is going on within a mining behemoth like BHP.

I won’t invest in BHP, even if the share price has halved. That’s because I have no special insight when it comes to BHP, and every man and his dog thinks its smart to own shares. Newspaper columnists are bullishly shouting “Buy” — and have been all the way down.

Whether at $30, or at $20, there’s always someone willing to shout “Buy BHP!”

If you must, I’d wait until those voices get a lot quieter, before buying.

That’s because the reality is that BHP’s return on investment depends largely on factors outside its control: commodity prices. As a result, the company’s return on investment is unpredictable.

Maybe BHP shares will go up. Maybe the shares will go down. But one golden rule of investing — too often forgotten — is that when we buy or sell shares, someone is almost certainly getting a raw deal.

Unless you have a good reason to believe it’s the other guy, walk away.

Rather, take the time to get to know a company that you can actually understand in detail. For example, you might choose to study Telstra Corporation Ltd (ASX: TLS) or TPG Telecom Ltd (ASX: TPM). Or, if you’re a new parent or grandparent, you might want to look into infant formula providers like Bellamy’s Australia Ltd (ASX: BAL) and A2 Milk Company Ltd (ASX: A2M).

Be observant.

Before early investors in Bellamy’s and A2 Milk saw their shares soar in price, they saw the supermarket shelves empty.

Of course, these companies may not offer a good buying opportunity now that the market is awake to Chinese demand for our baby formula, but you can always learn about them so you’re ready to pounce when the opportunity arises. Or you can find a bunch of new ideas (and research) in our member only services.

Just remember to play to your strengths.

For example, if you, your child, your partner or your mate is an accountant, why not take a look at accountancy software provide Xero Limited (ASX: XRO)? Or if you are considering an annuity with Challenger Ltd (ASX: CGF), why not also take a look at shares in the company?

The average intelligent everyday investor has a good chance of deciding on a sensible price to buy (or sell) these companies — especially with our help. But how many BHP shareholders have even read the mammoth 324 page Annual report, let alone understood it?

If you want to start learning about companies you can understand, and that we think are worth learning about — and adding to your portfolio — the free report below is a great place to start.

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Motley Fool contributor Claude Walker owns shares of Bellamy's Australia and Xero. You can follow him on Twitter @claudedwalker

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Bellamy's Australia and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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