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Many investors spend a great deal of time trying to pick the best stocks, pay as little as possible in charges and ensure their portfolio is sufficiently diversified. All are noble pursuits that can improve returns over the long run.
However, in Questor’s view, patience is the biggest differentiator between success and failure in the world of stock market investing. Without it, investors are bound to fail – even if they buy a wide range of superb companies and pay a pittance in brokerage fees.
A patient approach affords your holdings the time they require to deliver on their potential. It will allow investors to enjoy capital gains that should outstrip those from any other major asset type over the long run.
This column’s advice to buy Anglo American in August 2022 has not proved to be a success thus far. The FTSE 100 mining giant’s share price has fallen by 23pc since our tip and in doing so has lagged the index by 24 percentage points.
The vast majority of its underperformance is due to the global economic slowdown. While the world economy grew by 3.5pc in 2022, the IMF expects it to expand by 3pc both this year and next as the full impact of monetary policy tightening in the US and Europe is felt.
This has prompted a marked decline in investor sentiment towards cyclical stocks, such as mining companies, that are highly dependent on the world economy’s performance. It has also had a material effect on the financial performance of such firms.
For instance, Anglo American’s latest half-year results showed a decline in profits to $5.1bn from $8.7bn in the same period of the previous year. This 41pc fall was largely due to a drop in commodity prices, although higher costs also weighed on performance. While higher production volumes offset this effect to some extent, lower prices ultimately mean lower profits for the company.
While this is clearly disappointing, it is very likely to be a temporary phenomenon. As any experienced investor will attest, periods of economic doom and gloom have always been followed by a boom. Commodity prices are also likely to be driven higher by the long-term demographic and environmental changes that formed a key part of our original investment thesis last year.
Indeed, Anglo American’s long-term prospects are broadly unchanged since our initial recommendation. Its strategy is still to transition towards future-facing commodities such as copper, iron ore and nickel, all of which are likely to be in high demand in electric vehicles and renewable energy infrastructure. It is also developing its crop nutrients business, which is likely to benefit from growing demand as the world’s population rises from 8bn to a forecast 9.7bn over the next 27 years.
The company’s financial position is still sound. Net debts are equivalent to just 25pc of assets, while net interest was covered more than 15 times by operating profits in the first half of the year despite the decline in profitability. This shows that the company has the financial means not only to overcome temporary global economic woes but to continue to invest in its asset base to capitalise on the next period of growth.
In the meantime, it expects to deliver annual cost reductions of $500m to support profit margins. It is also on track to meet full-year production guidance that includes a step-up in volumes in the second half of the year. And with a diverse range of operations across a variety of countries, the company remains less risky than many pure-play rivals whose operations are based in a more limited range of locations.
Trading at less than 10 times forecast earnings, the company’s shares continue to offer excellent value for money and clear scope for significant capital growth as the global economy’s performance improves.
When that will take place remains unknown – just as it was at the time of our initial recommendation. But with a solid financial position, a wide margin of safety and exposure to commodities likely to be among the most in demand over the coming years, investors in Anglo American should be well rewarded for their patience.
Questor says: buy
Ticker: AAL
Share price at close: £21.58
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