Learn From Buffett

So I see that silver hit $50 an ounce recently.

A lot of sages have been vindicated on that one - notably Jim Rogers who's long been saying that silver (and palladium) had better ROI prospects than gold.

Check out that chart. Do you see that low in the mid-late 90s?

Around $5 an ounce is where Warren Buffet dumped a ginormous silver investment. That was when breakthroughs in digital photography destroyed the old camera technology which had constituted huge industrial demand for silver. Recall Eastman Kodak's stock (a Dow Jones Industrial component) got absolutely crushed.

So what else is that *sage* doing now that we can learn from?

I say take a good look at Wells Fargo. Buffett, while a long-time investor, arrogantly added to this investment in the high 20s.

To be clear for a few Morons....I'm saying to short the stock just as I am via long-term puts. It's probably time for me to buy some more now that I think of it. (I just did today actually.)

More Vindication For Jim Rogers

I believe cotton has been one of his *favorites* all along.

If you check out the posts below, please have some sympathy for me getting shaken out of my commodity *investments* (cotton bought at $61.67!) waaaaaaay too early...

I KNEW they were going up; and I KNEW I had to hold them through some volatility; BUT I just couldn't pull it off.

See also:

Now I'm Officially A Commodities Investor.

More Commodities Meat

Jim Rogers Shorting Warren Buffett?

Old buddy Jim Rogers said recently:

"I'm short a large western financial institution that everybody thinks is terrific."

Hmmmm....

Any guesses as to which one?

I'll bet it's the one I'm heavily short - Wells Fargo - if only because of his *terrific* hint.

Better Bundlers....Get Paid

Check out these two screenshots:





They are from *unofficial* blogs of Jim Roger and Peter Schiff. In fact I follow both of them in my Google Reader.

What they do, particularly with a far-flung guy like Rogers, is simply collate and bundle his public commentary - videos and quotes. This is an almost effortless task with Google email search alerts and whatnot.

As you can see, the sites are littered with *ads* and they both show up HIGH atop the search results for these market mavens. So the site-owners are probably making some nice change - especially given the ease of their actual work.

I'd say that's not a bad business plan at all!

See also - Submit Thyself To Google.

All Things Jim Rogers

Can be found on this blog.

Usually, I simply google "jim rogers" on Google News to see he's said anything lately.

It looks like that site keeps track of everything he utters so now my workload is a bit easier.

I spent 30 minutes last night reading up on Jim's thoughts and investments. If you have the time yourself it will be well spent.

Jim Rogers Update

That was from October 22nd.

Obviously, his commodities and Chinese investments have been hammered - much, if not more, than everything else these days.

With oil at $58 today (down from $148 this July) I think investors can very safely buy the diversified basket of commodities and sleep well at night.

Though, I'm not too sure about China.

Eleven months ago, I predicted a *50%-70% pullback in China*.



As you can see, the iShares China ETF has more than halved since my post last December.

Too bad I didn't get short!

A Bear In The China Shop

Alright, I read Jim Rogers' A Bull In China - Investing Profitably In The World's Greatest Market the other day. It's an effortless 200 pages.

I always take notes when I read but didn't jot too many down on this little potboiler.

Here's the deal, as of 2004, Chinese workers earned on average 64 cents per hour compared, er contrasted, to the average American who made $21.11. So obviously, there's a gap to potentially close. Rogers maintains that investing in China today is like investing in America in the year 1900. That sounds pretty enticing, does it not? Click the following graph to enlarge.



But, as you can see from this 100 year chart, investing in the Dow in 1900 wouldn't have done much for you for 40-50 years. Herein lies one of my problems with Rogers' advice - his time horizons are too long. What the heck isn't going to go up in 40-50 years?

For sure, China has a nice fundamental story. They speak one language, are industrious, entrepreneurial, and hefty savers. The nominally communist government has been liberalizing commerce and unlocking the energy of its one billion citizens. You don't even have to go to China to see how hard the Chinese work. Just think about your dry cleaner or your local Chinese restaurant. Do you know ANYONE that can match their national average of saving 30% of their income?

This tremendous savings (and possibly reinvestment) really geeks the Sino bulls up. It also stokes America deprecators who see the US as lazy and addicted to debt-financed consumption. On this point it's very hard to defend the old Red, White, and Blue. (For the record, my wife and I do save over 30% of our annual income - mostly because we rent and because of my jeans.)

To Rogers credit, he doesn't tell you what or when to buy, specifically. He profiles all the big public Chinese companies and prescribes how one might buy shares on any of the various exchanges they trade on. He advises over and over, in all his books, to do your own homework. Wall Streeters usually refer to this as you own "due diligence". With this tack I couldn't agree more. Investors/traders always have to be comfortable with their bets - otherwise they'll be shaken or scared out of them by periodic market volatility.

Here's another window into the "smallness" and potential of China's economy:

Today, for every 1,000 people, the United States has 700 cars.

Yet, for every 1,000 Chinamen, there are only 24 cars.

What it means, is that since essentially no one currently drives in China, there's plenty of upside for its domestic automakers, auto parts suppliers, road builders, motels, tourism, restaurants, etc.

This is Jim's recurring thesis of Chinese investment - that all their industries are still in the infantile stage. One of the differences between America in 1900 and China is 2007 is that China doesn't have to invent anything. They are simply importing ideas, know-how, and capital from proven industries. So conceivabley, China's prosperity should be on a faster track than that of America circa 1900.

So, what about the downside to investing in China?



As with any investment, PRICE is paramount. Above find a graph of the FXI, an index of 25 tradable, large Chinese companies. As you can readily see, it's more than tripled over the past three years. Rogers would suggest you buy and forget about it - because of the far-sighted prospects. But I could easily see a 50%-70% pullback in the meantime.

Just as with commodities, I am sold on Jim Rogers' China Bull thesis but I am going to wait for a substantial decline before making any long-term investments. The risk of course, is that I'll miss the boat. If you go read my old post on Hot Commodities, you'll see that I am still waiting for a dip that hasn't come.

So what would make the Chinese economy hiccup?

First off, a financial disruption. There are still no accounting standards or transparency for banks in China. Everyone knows there are billions of bad loans hidden on their books. These time bombs remain sheltered by the froth and mania of today's investment euphoria. Money has been pouring into China from both productive self-generation and through intrepid foreigners. Fraud and shenanigans always follow the easy capital - just note the role of abundant funds in today's American subprime mortgage calamity.

China also will have the normal growing pains of a rapidly transforming country. Social upheaval of some sort is all but guaranteed by the ongoing emigration of millions of poor Chinese from rural to urban areas. There have been peasant uprisings in China since the beginning of time. And no one can predict how the liberalizing, but still latently authoritarian, government will react to social uprisings. Even our mature, tried-and-tested government doesn't perform so well in crises.



Now add to the social growing pains, the strain of a hyper-growth economy on infrastructure. China is already one filthy country - quite contrary to the fawning of Al Gore. Their rivers are veritable sewers. Seventy percent of their power is generated by dirty coal. Even though there are only 24 cars per thousand people, automobile exhaust is already a problem in the cities. Here's a headline from just the other day.

Beijing air pollution 'as bad as it can get,' official says

Supposedly, Chinese air pollution already reaches the California coast.

China's other big environmental problem is a serious water shortage. Water isn't just for drinking. Something like 70% of water usage in the US is devoted to agriculture - so you can flush your toilet with impunity! Since China has over a billion mouths to feed, they need water to grow domestic crops. The alternative is of course to import food, e.g. soybeans.



Similar to the US, a big looming financial problem for China is inflation. So what does it emanate from? An artificially weak currency? Rapid economic growth? Is it a US export? I'll let others argue over the origin. It suffices to say that Chinese inflation is rampant and it's causing problems. Here's another link on Chinese inflation.



My last caveat about China concerns its demographic issues. The long standing one-child policy has begotten a nation of spoiled brats. This was alluded to in an older post on Mark Steyn's book. Steyn argues that the demise of Japan, the most recent can't-miss Asian super-economy, was unavoidable due to their aging, sterile population. In short, young people are hungrier; they work harder; and are the lifeblood and oxygen of a vibrant economy. Steyn is no financial analyst, but his argumentation is tough to discount.



Jim Rogers' penultimate book Hot Commodities was subtitled "How Anyone Can Invest Profitably in the World's Best Market". Now his recent book on China is subtitled, "Investing Profitably in the World's Greatest Market".

So commodities are the "Best" and China is the "Greatest"?

I can't wait to see what superlative adjective he whips out for his next book!

Anyway, he says if you want double exposure, then you should buy Chinese commodity plays. That makes a ton of sense.

But for now, I am not buyin' nothin'. I am still more of a trader than an investor - a point that I hope to expound upon in a subsequent post.

Jim's book did however pique my interest in China. I've erased a monitor page on my trading application and refilled it with Chinese names. I am going to look to buy big dips and short into steep rallies. It's all but a 100% likelihood that the Chinese stock market is going to crash - with only "when" and "from what level" yet to be determined. The Chinese will surely revalue their currency soon but I bet they wait until after the Beijing Olympics for fear of negative consequences.

For the sake of all, let's hope these Games don't represent for China the top of a sucker's rally like the 1984 Winter Olympics did for Sarajevo.

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)