Monday, August 13, 2007

I Am Now Officially A Commodity Investor

After much mental flirtation, I finally pulled the trigger. This past week I got long sugar, cotton, coffee, and cocoa. I bought out-month futures and plan to roll them over indefinitely.

I fully expect the commodity market to pull back right in my face - because this is what ALWAYS happens - so I only bought a little of each and will look to buy more on substantial pullbacks. (Actually, a notable exception was Google which never pulled back; I had to chase it and average up in it.)

Ideally, I was waiting for a hiccup in Asia or world markets to furnish a cheap entry point - see my old post - but obviously I have succumbed to impatience.

I had recently been trying to convince a few of my dear acquaintances to get some long commodity exposure and in the process I realized that although I was shorting bonds, and playing the long side of silver, gold, and oil, I didn't quite have enough exposure myself. The arguments for buying grains, metals, energy, etc. are quite compelling, even if not as outright speculative investments, but as diversification bulwarks against other depreciating assets. Commodities have a purely negative historical correlation with stocks, bonds, and real estate. Here are some bullet points I grabbed from googling commodity guru Jim Rogers.
  • From 1966 to 1982, stocks and bonds floundered while commodities soared. This historical fact escapes probably 98% of today's "long term" stock investors who mistakenly believe that "averaging" into mutuals each month and each year is a can't-lose strategy.
  • In the 1970s, nobody knew what a junk bond was. In the 1980s, they of course took off as an asset class. The same goes for mutual funds. Twenty-five years ago, they were an unheard-of financial instrument. Today, nobody talks about commodities but this burgeoning bull market will arouse and legitimize interest in them as sound investments.
  • Yale University recently did a study, and the Wharton School at the University of Pennsylvania determined that in the past 45 years, you'd have made more money in commodities than in stocks, with less volatility and a better inflation hedge.(link)
  • The commodity bull argument is a simple one of oscillating supply and demand. Corn, oil, lead, etc. go through periodic cycles of over- and under-investment. Since planting, mining, and "E&P" (exploration and production) take so long, commodity bull markets have all lasted at least 15 years. If it started in 1999, then history suggests we have at least another 7 years. Just think how much money was to be made in the latter half of the Nasdaq bubble or the housing bubble...
  • Let me re-frame that last point. What it means is that when say oil spikes from $30 to $50, because of the inherent logistical issues with drilling and exploration: permits, fighting with environmentalists, redeploying equipment, etc., it takes a very long time for supply to react to higher market prices. So a commodity bull market chugs with freight-train-like momentum.

First, here are multi-year charts of the four commodities I recently bought: cotton, cocoa, coffee, sugar.

Rogers asserts that in the context of a commodities bull market, all commodities will make record highs. So clearly, if that premise is true, the plentiful upside is easy to see on the charts.

Now here are some others for your edification: wheat, oats, and corn.

As always, click on any of the charts to enlarge them.

Jim is very bullish on the agricultural commodities for a host of reasons. You can see that the last three charts exploded recently. Corn's rise is being "blamed" on ethanol mandates. Whatever. If you are long, then who cares what academic-types are musing.

Despite the cornucopia of information that is the World Wide Web, I have had a really hard time trying to research commodity trading and investing. I couldn't even find a decent blog on the subject. Though I am a rank amateur in this particular field, I will start to post more regularly on the subject. I will post what I learn if for no other reason to help other aspirants.

My commodities/futures account is at Interactive Brokers and I am quite happy with it so far. I researched others but didn't really get a good vibe from any of them. If anyone has a better recommendation, please inform me. Interactive is primarily an electronic brokerage firm - a WalMart, so-to-speak, that has been hammering away at brokerage commissions for years. As best as I can tell, they aren't looking to lean on customer order flow like most of the firms that show up in the "paid" search results for "commodity trading" and whatnot.

Here is one good website that can serve as a reference of sorts for introductory commodity info.

And here is another that I have used for years for basic charts, trading information, option volumes, etc.

Jim Rogers admonishes investors in all his interviews, "Do your own research". So I am; nonetheless I will do my best to pass on what I learn.

Note how many people know what "756", "Bonds", "Hank Aaron" represent and mean. But how few of us know where sugar comes from, its price history, or its economic fundamentals.

One understanding can possibly make you rich whilst the other can, at best, distract you from your poverty.

So in the process of trying to interest my friends in commodities, I really only bulled myself up. The same thing happened when I wrote that Google Price Target 3,000 post - by the time I was done, I went out and bought some more at I believe $375 per share (Google is currently trading $515)


Anonymous said...

Hey Captious - I have been a big fan of Jim's since his first book. He himself has a fantastic story. I have never done the legwork you have apparently done to buy commodity contracts. I have thought about the Pimco funds and even the one Jimmy runs but found the expenses way too high so I have done nothing. Then I thought about ETF's like the Powershares Agriculture ETF (dba) but never pulled the trigger. Should I think about futures contracts as 'calls'?
Finally, what is amazing about Jimmy is his nature. I sent him an e-mail and he responded in a very thoughtful way. Keep up the good work!

CaptiousNut said...

The expenses are way too high. That is the toll scarce products can exact. Also, it's very hard for an individual investor to go buy the basket of commodities himself - due to the sheer size of the minimum contracts.

I will do a post on this soon.

Jim's email responses to me have been illiterate and borderline rude. Anyway, I have read all his books.