Investors who seek ordinary returns should act in line with the average investor, sticking to market consensus. However, those looking for extraordinary portfolio performance must be prepared to act against flow. In my view, yesterday's dramatic falls in the price of major global mining groups are offering an opportunity, in the words of Ben Graham and Warren Buffet, to "be greedy when others are fearful".
Concerns about growth in China are once again rattling BHP's and Rio's share prices. While in the short term we may see lower levels, the charts below show them approaching important price levels. Why should investors consider taking advantage of these lower prices?
The Asset Allocation argument
In times of improving global growth, investors may benefit by moving towards share markets and away from "safe havens" such as bonds and gold. Those who look through the "noise" and view the data locally and and internationally as showing a trend towards better global growth prospects are likely buying right now - particularly those who bucked consensus and bought dividend yielding stocks 6-18 months ago.
Yesterday's fears about China appeared to focus solely on an 18% yoy drop in exports, ignoring a 10% increase in imports and the fact that these numbers came during the month of February - that included a nine day holiday. The focus on one month of weaker exports also contradicts the most recent GDP reading, which shows the economy in China continued to expand at rates above 7.5%
As the twin themes of emerging growth and withdrawal of central bank stimulus play out over 2014, it's possible share markets will see increasing volatility and dramatic swings, both in individual stocks and share markets as a whole. In this environment, rewards are likely to go to active investors - those who buy price weakness and sell strength.
Iron ore prices
A valid reason to sell BHP and Rio is lower iron ore prices. The dramatic three month drop in ore from $140 to $105 should put pressure on share prices - although it's interesting to note that both hit year highs in February while ore prices were around $120 a tonne. The markets have had a chance to factor these lower prices, and with a multi-year low around $86 the risks for iron ore now switch to the upside, in my opinion.
Here are the charts:
Note how both have fallen by more than 10%, both are approaching key support levels, and both are showing oversold readings on the RSI at the bottom of the chart. In my view, its time to buy BHP and Rio. This is the pullback many investors have waited for - especially those who are overweight banks and telcos and underweight resources.