Commodotise my assets

There are two conflicting pieces of advice that investors are frequently given:

One is that you should invest in what you know.

The other is that you should diversify your investments.

So what is the poor investor who does not know everything to do? Maybe invest in small cap high potential companies in the fields that he knows and only invest in large caps in the fields he does not know.

I do not know much about commodities but I would like a stake in the industry so I guess I should stick to the big guns. Here are two:

Rio Tinto

RIO is an international miner of iron ore, coal, uranium, aluminium, copper and diamonds. While most of the operations are in North America and Australia it does have operations in South America, South Africa and Europe as well.

The market cap. is about £29 billion, the PE is about 9 and the dividend yield is about 2%. The PE ratio makes RIO look cheap but most brokers seem to think that commity prices will fall next year and RIO will earn less.

Have said that half the 23 brokers that follow RIO have it down as a buy.

Paul Skinner, the chairman, said in August that “Although we have seen increased volatility in financial markets, underlying demand for ourproducts remains strong, and we remain positive about the outlook for the global economyand our markets.”

So a nice picture there.

BHP Billiton

BHP Billiton (BLT) is the world's largest diversified resources company. It mines iron ore, copper, coal, nickel, uranium, aluminium and oil. It is a truly global operation with mines scattered all over the world.

The market cap. is £28 billion, the PE is about 8 and the dividend yield is just over 2%.

Of the 18 brokers that follow this stock 9 have it as a buy and none are negative about it.

The way these companies' share movements follow each other is quite amazing:


Not much to choose between them then.

So which one do I favour? Well as the share prices follow each other I would probably go for the one with the lower PE ratio and the higher yield. That would be BLT. BLT is also more diversified and has a significant petroleum business which is a high margin business.

It looks like BLT for me and I don't mean bacon, lettuce and tomato!