McElroy's Certainty Principle
- You'll never get rich from quantum physics
- My principle lets you hold on to your money
- An iron-clad certainty
Whereas the scientist Dr. Werner Heisenberg is famous for his Uncertainty Principle of quantum physics, I'm somewhat less notorious for my Certainty Principle of investing. But I have one thing going for me: my principle is a lot more likely to help you and me make some money. I won't win any Nobel Prizes, but I might be able to retire a decade earlier.
I bring up quantum physics, because much of that field is based on the idea that you can't know everything all at once. Making meaningful observations about a given particle entails giving up knowledge of either its position or its velocity/direction - both of which are important for any physics problem.
In the investment world - unlike quantum physics, we can know with a great deal of certainty the position and direction of a company.
Because investing is different than quantum physics, thankfully.
We can know the direction and position of a publicly traded company because these companies are required to accurately report these facts in quarterly and annual reports.
And whereas your guess is as good as mine about where all the photons are in a hurry to, it's much, much easier to see that some companies just aren't going anywhere.
For the bulk of your portfolio, you should be seeking these types of companies. Sure, you're not likely to double your money very quickly with my "Certainty Principle" companies, but in a volatile bear market, having your money stay put is a true triumph.
I was reminded of my certainty principle while reading a recent Wall Street Journal article about "uncertainties" related to Australian mining giant Rio Tinto (NYSE: RTP).
This $23 billion market cap company mines just about everything you can think of: aluminum; copper, gold, molybdenum, silver, and nickel; diamonds; industrial minerals, such as borates, titanium dioxide feedstocks, talc, salt, metal powders, zircon, and rutile; thermal and coking coal, and uranium; and iron ore.
I'm probably missing a few - but you get the idea.
Right now this company is in the midst of a nasty new potential 40% Australian mining tax, which could certainly hurt their bottom line.
The stock is down on this news, as well as news that their iron ore production fell 2% year over year.
But Rio Tinto is one of the world's largest iron ore producers. Much of that iron ore is shipped to China - in addition to the necessary coal and coking coal needed to make steel. So a bet on Rio Tinto is a bet that China will continue to build skyscrapers to match their ~8% annual growth projections.
The world uses between 950 and 1300 billion metric tons of iron every year - it's the most commonly used industrial metal - but it's also the cheapest.
That means that only huge international mining corporations have the scale to make a profitable go of iron ore production. They squeeze everyone else out of the marketplace by their sheer volume. If the Australian 40% tax on mining does manage to stick, it will certainly hurt Rio Tinto's share price in the short term - but for the long term it will just act as another barrier to entry for smaller companies in the field. They'll still continue to get iron ore out of the ground and sell it to the Chinese for a ~12% profit margin.
And right now Rio Tinto is extraordinarily cheap. The stock sells for less than five times trailing earnings and at $47.50 per share, it hasn't been cheaper all year.
If you like the "certainty" that the world will continue to use billions of metric tons of iron, and that China will continue its growth, and that Rio Tinto will continue to be one of the sole providers of iron ore...then you should own this stock.
I'd suggest buying it under its 200 day simple moving average of about $51, collect the 1.8% dividend and hold until the certainties change.
Good investing,
Kevin McElroy
Editor
Resource Prospector
