As an investor, you should say no to plenty of opportunities. There is something like 2,000 companies on the ASX, and you can't own them all.
It's also unlikely that you'll ever get the chance to look at them all in depth. So sometimes you must use mental shortcuts – heuristics – to trim your list of possible purchases. Here are 3 that I apply to BHP Billiton Limited (ASX: BHP):
- It's very unlikely to ever deliver 5x my money
BHP already mines approximately 1/5th of the world's iron ore and 8% of the world's copper. It's very difficult for the $132 billion company to become significantly larger because a) it is hard to find world-class resources, and b) commodity demand grows at a slow rate, so any large increase in output would likely hurt mineral prices.
- It's a cyclical commodity producer
When mineral prices go down, so do earnings. It's difficult to understand and/or predict the commodity cycle, which can make it hard to determine the fair value of the company's shares. Cycles can also take much longer to turn than people think.
- It's highly dependent on China
In general, I'm bullish on China, especially its consumers. However, from the outside it increasingly looks as though the primary driver of iron ore demand is unproductive infrastructure funded by increasingly wild levels of debt.
That's not to say that BHP is a bad company, it's just that I'm a young investor and it's not suitable for me. There is a price and a time at which I'd own it, if I formed a strong view on the commodity cycle, but typically I avoid it.
