Wednesday, January 30, 2008

HOT COMMODITIES by Rogers (Review)

Book: Hot Commodities
Author: Jim Rogers
Subject: Investing

In Hot Commodities, Jim Rogers gives us an introduction to the world of commodities investing. Of the different asset classes available to investors, the commodities class receives little attention from average investors or the institutions that sell investment services. However, Rogers references studies that show that commodities give comparable returns to stocks. Moreover, he explains how stocks and commodities traditionally run in inverse cycles: when stocks are in a bull market, commodities are often in a bear market and vice-versa. Since long term bull and bear markets can run in cycles of 13 to 18 years, sticking to either to the exclusion of the other means your investments can needlessly languish due to ignorance of how to diversify into commodities.

The book is divided into four parts. First, Rogers familiarizes the reader with the history, terminology, and mechanics of how the commodities markets work. In the next section, he analyzes the demand side of the commodities market in the growing economies of Asia, especially China. The third part of his book analyzes specific commodities including oil, gold, lead, sugar and coffee. And the final section of his book is a collection of reference charts and graphs of different indexes and histories.

The strong lesson I took from the book is that you cannot be a dilettante commodities investor. Whereas you might buy a stock being totally ignorant of how to value it and watch it rise in market price because a lot of other ignorant investors are bidding it up, in commodities you are working against professionals in a very simple market. There are not lots of nuanced measures to interpret like price-to-earnings or book-to-sales in stocks. In commodities, there’s just one: supply versus demand. If the demand for a commodity outstrips supply, the price will go up. If the supply exceeds demand, it will fall. You make money either way by making accurate readings of the available and new supplies versus the current and future demand. The other powerful factor in commodities trading is that you are buying on margin. In other words, you only have to pay for a small percentage of the commodity lot you buy. This presents opportunities for huge gains or losses in a very short time.

Buying on margin is the source of the horror stories of the amateur commodities investor. For example, the rules of the exchange might allow you to buy LONG $100 worth of a commodity A for $5 (different commodities have different percentages). Buying long means you are speculating that the price will go up. If the price does go up to $105, you can sell your contract and you’ve made a 100% gain! However, if the price falls to $95, your entire investment could be wiped out as all accounts are cash accounts that have to be settled at the end of the trading day. To make money investing in commodities, Rogers recommends study and specialization. In other words, he advises speculators to become experts in a single market like copper or sugar and to put in the study to learn just how much of the stuff is out there and how it gets used.

Current returns place us today in the midst of a commodities bull market. Rogers happened to have predicted its advent fairly accurately and places its beginning in 1999. The historical trend is that the long term commodities bull will last around 18 years placing us somewhere in the middle of the current run. As evidence of these facts, many commodities like gold, oil, corn, sugar, plutonium and copper have doubled in price or increased in value by many multiples of their 1999 value. By comparison, the S&P 500 has languished in the same territory over that period and the NASDAQ has never recovered its peak value. A sensible definition of true investing (as explained by Professor of Finance Michael Rozeff) – as opposed to speculation – requires diversifying your wealth across as broad a range of the asset classes as possible to get the average value of the markets. To that end, I can recommend Roger’s book as an excellent introduction to an education in commodities.

CRASH PROOF by Schiff (Review)

Book: Crash Proof: How to Profit from the Coming Economic Collapse
Authors: Peter Schiff, John Downes
Subject: Financial

Review by Robert Jackson

Peter Schiff's CRASH PROOF is an easy-to-read narrative that gives the author's prediction of the coming collapse of the American standard of living and his prescription of how to safeguard or even enhance your material well-being as it unfolds. Schiff's background is president of an investment fund group and being the contrarian prognosticator on several cable television business programs.

The book is laid out in 2 parts, the first two-thirds describing the macro economic trends to support his prediction and the last third covering his advice to readers on how to thrive in the midst of a crumbling American economy.

My introduction to Peter Schiff was through You-Tube as I watched him on a cable business show accurately predict the housing bubble collapse we are now experiencing even as his position was being ridiculed by the other talking heads on the show. After reading another review of this recently released book, I decided I wanted to read it for myself to find out what his insights were on the present growing global financial crisis. The book is easy reading and interspersed with amusing metaphors that make his analysis understandable to readers without deep financial literacy.

Schiff begins by laying out background knowledge in understandable terms. He explains money, savings, consumption, investment, inflation, the housing bubble, the trade deficit and the other vocabulary in a way a neophyte could understand. He then explains how the American economy has evolved to its present condition citing the theories of classical economists such as Say and Mises. In an amusing metaphor, he compares the American economy to an inhabitant on a deserted island with a few other Asian inhabitants, making it clear to the reader that if the Asians are catching cleaning cooking and serving the fish, the American is not an "indispensable" member of this economy as the "consumer of the meal." For those of us with a good memory of the 1970's, he makes a good case for the return of "stagflation" which is characterized by rising prices even as the economy shrinks in size, two conditions that are not supposed to happen together in the models of Keynesian economics.

Speaking in the most general terms, Schiff's solutions lie in getting your personal wealth out of the U.S. dollar. His book goes into some detail (including offering his own investment group as agent to make these investments for you). For the most part, he's addressing people who do have some wealth as opposed to people who are already deep in debt or in dire straits. But he does offer some common sense advice usable even to penny savers.

The book was written some months ago at the peak of the housing bubble and well before the alarms in the banking sector that began happening this past August. So we are treated to his accurate analysis of the collapse of the housing bubble as confirmation of his insight. Still, the window has not closed on his advice though the opportunities he's talking about could disappear quickly in the short months ahead. Overall, I can recommend "Crash Proof", and will continue to find it handy as an introductory reference of how to invest in some non-mainstream ways.