Carl Gustav Jacob Jacobi is a German mathematician who was born in the early 19th century. He has a reputation as one of the finest mathematicians the world has ever known. But just why would a math wizard appear in an investing article here?
Thing is, Jacobi has a phrase that’s oft-quoted by investing maestro Charlie Munger and that is, “Invert, always invert.” Jacobi believed that problems are best solved when inverted. I believe this applies to investing too.
So, instead of asking “What should I do to make money in stocks,” a better question could be “How should I avoid losing money when investing?”
To answer the latter question, below are four things we can do. While the list I have here is not exhaustive as a ‘how-to’ on minimising your odds of losing money while investing, it’s still a good place to start.
For the first three things, head here.
4. Be very careful when extrapolating macro-economic trends to stock market gains
It’s easy to imagine that a commodity producer – say, a coal miner – will see its stock do well if the price of coal will climb. Reality though, shows otherwise.
From 30 September 2005 to 15 September 2015, the price of gold in Australian dollars had actually stepped by a very healthy rate of 9.6% from A$621 per ounce to A$1,500. But, an index of Australian gold-mining stocks, the S&P / ASX All Ordinaries Gold Index, had actually declined by 4% annually over the same period, sliding from 3,372 points to 2,245.
According to an article on Bloomberg published earlier today, the price of palm oil has “surged 27 percent from a six-year low in August.” But, palm oil companies in Singapore’s stock market, such as Golden Agri-Resources Ltd (SGX: E5H) and Bumitama Agri Ltd (SGX: P8Z), haven’t necessarily reacted – the latter has stepped up by just 11.1% since the end of August while the latter has stayed flat.
So as you can see, a commodity’s price movement over both the short- and long-term need not necessarily have any strong links with how the share prices of its producers move over similar time frames.
Ultimately, it’s the commodity producer’s business results which matter. What are the commodity producer’s all-in production costs and how might it evolve in the years ahead? Can the commodity producer’s balance sheet withstand a prolonged period of low prices without being forced to raise equity or sell assets? Is there significant scope for an expansion of production volume for the company?
These questions – and more – need to be asked in order to determine how well the commodity producer’s business will fare over the long-term future. A commodity producer can still be a crappy business even if the price of its commodity rises.
There are many obstacles that can stand between a growing macro-trend and a company’s business growth. It’s the obstacles that we investors have to focus on.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.