Commodities are Jim Rogers’ investment passion. As a measure of their neglect by other investors, he puts forward a simple observation: “There are 40,000 mutual funds for stocks and bonds, but you cannot find five mutual funds investing in commodities.”
Rogers, a co-founder of the Quantum fund, and best-selling author of ‘Adventure Capitalist’ and ‘Investment Biker’, has just published ‘Hot Commodities’. Not surprisingly he has hot views on commodity investing.
Investors have shunned commodities partly because they do not know anything about them. “They have heard all about people losing money on commodities, but that’s why there are great opportunities.”
As a consequence, commodities are an unknown asset class. “The Wall Street Journal Europe gives commodity prices each day, but rarely writes anything about investing in commodities, while the Wall Street Journal in the US, gives a few paragraphs.”
Even among institutional investors, such as endowments or pension funds, there is virtually no interest, he maintains. “If you approach them, they say ‘go away and leave me alone!’”
Commodities are cheap, unknown and unloved. Definitely time to look at them again, Rogers reckons. “They are a powerful way to make a lot of money if you do your homework.”
Yale University undertook a study, which concluded in general terms that you can invest in commodities with less risk and a better inflation hedge than you would have in stocks over the past 45 years. “Now the academics are learning about commodities, they are making them legitimate and confirming everything I have been trying to say,” Rogers notes. He hopes investors will now start to sit up and take notice.He cites the case of junk bonds, which 30 years ago no one had heard of. “Now hundreds of millions are invested in these each day. That’s what’s going to happen with commodities.”
His belief is that it is commodities for everyone – including pension funds. “The reason is that they are simpler to analyse than stocks,” he says. Commodities are part of everyday life. “With copper, you know what it is.”
Natural gas is a commodity that has tripled in price in the last three years. Enron was a natural gas company that collapsed to nothing. “Natural gas can never go to zero.” It is easier to do the necessary homework on commodities than on any other investment, he claims.
Why is Rogers so bullish about commodities now? “We have had recurring bull and bear markets in commodities going back for hundreds of years. It’s part of economic history. What causes these are supply and demand. In the 1980s and 1990s, people pushed ‘hot stocks’, but no one said invest in sugar plantations or lead mines.”
Similarly, because of the bear market in commodities, there was no investment in productive capacity. “There has been only one lead mine opened in the world in past 25 years. The last lead smelter to be built in the US was in 1969. And there has been no major oil discoveries in the last 25 years. What happens is that oil reserves and mines become depleted.”
But in the meantime demand has been increasing with the economic growth in Asia and elsewhere. Ergo – you have a bull market in Rogers’ view.
It is the simplicity of market that Rogers underscores again and again. There may be 30,000 stocks in the world but there are only about 50 commodities that trade regularly on exchanges in some volume. “That makes it a lot simpler to figure out commodities.”
Crude oil is the most actively traded and biggest commodity by volume, but the story extends right down to silk or coffee. “It is easier to figure out what is happening in lead production and consumption than it is with the latest dotcom company. If there’s too much the price goes down and if there is too little, the price goes up.”
So, those currently worth keeping an eye on are the agricultural commodities which have moved the least and are cheap on a historic basis. “There could be fortunes made here.”
It is possible to invest in commodities through the related stocks. “But the Yale study showed that the returns were 300% more from investing in the commodities than in the stock.” It is usually better to invest in the commodity than in the related stock, he maintains.
Certainly, some countries will do better than others, so he predicts that the Canadian economy will do better as a primary producer than the US economy. “So you could buy Canadian retailers or whatever, if you do not want to buy commodities.” Similarly, the Canadian dollar will do better than the US currency.
Rogers suggests tapping directly into the different information resources provided by the markets that trade or the different ‘councils’ that are involved with promoting different commodities, such as the Gold Council. There is a lot of basic information out there, even if there is not that much written.
In commodities, Rogers maintains that index investing consistently outperforms active management some 80% of the time. “But if you can find a great active manager, then do it. Besides the difficulty in finding the person, once they become successful, they won’t take your money anymore.”
He reckons indexing is the surest way forward. The Goldman Sachs index is used by investors, but he is not enamoured by it, with its heavy energy weighting. “They change the components very dramatically every year.”
Rogers himself started an index fund in 1998, which he says has done 350% better that the average active commodity manager. “Index investing will outperform most of the active managers most of the time.”
He launched the fund as the bear market in commodities was ending and now it is up 190% since launch. “But as an index fund, it is not managed at all, except for the rolling forward of the contracts.”
He says he developed his own index as he was not impressed with those that were available. Originally, he wanted to license one, but found that those available had some flaws, such as being too US-centric and not including rice. One weighted orange juice and crude oil the same. “I tried to weight mine to some extent to the importance of doing business around the world.” So far the weightings have remained the same. But should something dramatic happen to orange juice, for example if it was discovered to be a cure for cancer, then there could be a case for increasing the weighting.
He predicts there will be setbacks for commodities investors. For example, if China has a hard landing this year it may cause a setback in the market, and if this happens his advice is to buyboth commodities and China. “That’s going to be your last opportunity to buy them.
“The bull market in bonds is over. Bonds peaked in 2003 and could now be going down for the next 20 years or so. They are now in a long bear market having been in a long bull market. Even if bonds do not go down investors would not be making any money from them at 4% yields,” he says.
“Stocks all over the world are over-priced.” For the next one to two decades stocks are going to act as in the 1970s and fluctuate. “If you are good at catching these swings you will make money.” And real estate in much of the world is in a bubble, he adds. Therein lies the case for commodities, according to Rogers.