Apr 1, 2013

Book Excerpts of "HOT COMMODITIES", how anyone can invest profitably in the world’s best market” by Jim Rogers

“HOT COMMODITIES, how anyone can invest profitably in the world’s best market” by Jim Rogers
Publish date= 1994
Introduction and prologue by us:
Jim Rogers founded the famous Quantum Fund along with George Soros. However, he became more famous after he successfully predicted and aggressively advocated, in the early years of first decade of twenty first century; for case for a bull market across commodities. He wrote this book basically to express his views on the same and giving out information about trading and investing in commodities.
It was a precious reading at the time of launch. However, even after now close to a decade since the book was first published (2004), the lessons on commodity investing and importantly the approach towards it has not vanished.
There are very good explanation about some of the most important commodities in detail and their history as well.
One has to keep in mind, that today, in the investment world as we know it, commodities are not an entirely a new asset class. However, while this book was written, it was not. It was only beginning to start to get recognition, and perhaps one of the strong important factors was this book itself.  Since, then in last 5-8 years, commodities have an ‘official’ asset class for diversification, rather than an element ‘included passively into equities’. Hundreds and thousands of commodity specific funds have been introduced by investment companies across the world. The advent of Commodity ETFs have given enormous boost to them and the almost long lasting position of commodities seem to have been cemented into the investment world of this new century.

Below are some of the important excerpts from the book,
       ……I had always been interested in current affairs and history, and it was a revelation to learn that someone on Wall Street would actually pay me for figuring out that a revolution in Chile would drive up the price for copper.
       CRB Commodity Yearbook is a bible for all those who want to track commodities.
       I vaguely recall studying the CRB charts for various raw materials; when I saw a sharp rise, I analyzed why the prices of that commodity went up so quickly.
       Whenever someone claims that investing has become different this time around, I grab my money and run.
       There should be consistency, stability and transparency in an index.
       The Rogers Raw Materials Index Fund International Commodities Index opened for business August 1, 1998 based on the Rogers International Commodities Index (RICI). It features a basket of 36 commodities.
       I was now old enough to know that anytime you move away from the herd, the herd will criticize you, indeed revile you; it will call you ‘crazy’.

       Commodities are so pervasive that, in my view, you really cannot be a successful investor in stocks, bonds, or currencies without understanding them.
        One reason that companies and stocks did so well in the 1980s and was that raw materials were in a bear market: Cheap commodity prices removed the cost and margin pressures from companies that depend on natural resources to do business.
       The twentieth century saw three long commodities bulls (1906-1923, 1933-1953, 1968-1982), each lasting an average of a little more than 17 years.
       I am not certain about anything. “Certainty” is incomprehensible word to any rational and responsible investor. Only political ideologues, religious fanatics, and other madmen believe they have all the answers.         Happily, you need neither omniscience nor certainty to get rich. All you have to do is pay attention to where the opportunities are in the markets, keep an eye out for major changes that might affect them, and then act rationally and responsibly.
       Time turns even excess inventories into empty warehouses. No matter how much of a given commodity there is, if supplies are not maintained on a regular basis they will become depleted, leading to price increases.
       Between 1966 and 1982, the stock market went nowhere and with double-digit interest rates the bond market collapsed.
       The US has not built a new refinery since 1976 -and the number of domestic refineries has actually decreased by more than half...
       History tells us that in every bull market nearly everything reaches an all-time high.
       Historically, there has been a negative correlation between the price movement of stocks and commodities.
       Citing a research report: Stocks and commodities have alternated leadership in regular cycles averaging 18 years. - Barry Bannister
       Why the negative correlation (between stocks and commodity prices) ? I am not sure, but I have a theory. Consider Kellogg Company....(here, he explains by this company’s example that how companies get more profitable when commodity prices are lower as most companies’ use one or another commodity....so when commodities are in bear market the stocks of companies perform better due to better earnings....as costs are lower....and vice versa.....)
       ...it would also explain why commodity-producing companies (oil and mining companies, for example) and those that support and serve them (oil-rig manufacturers, tanker and container owners, trucking firms that haul metals and scrap, and so on) tend to do well during commodity bull markets.
       Centre of Finance :Facts and Fantasies about Commodity Futures’
       No bull market in any asset has ever gone straight up; periodic corrections will always occur. And when they do the smart investor will buy more.
       Experienced traders exec setbacks, and when they see prices going down they simply buy more. (personal comments: don't mix this with ‘never average losing position concept as this is different concept)
       At one time, JR said the prices of commodities should continue to rise at least up to 2015, citing a China example.
       The signal that a bull market is over is a series of fundamental changes in the way we live.
       The last leg of bull market always ends in hysteria; the last leg of bear market always ends in panic.
       when you see headlines about the discovery of new ol reserves or wind farms popping up outside major cities, when you see new mines coming on line, when you discover that stockpiles of all kinds of commodities are rising, those are fundamental shifts-then it’s time to get your money out of commodities. The bull market will be over.
       ...although the economy had been sagging for almost a year, not one of the 55 economists thought that it was in for a serious decline. One hundred percent were wrong-and proof that PhD economists are as prone to mob psychology as the rest of us.
       Mines do not last forever, and neither do existing inventories, if they are not increased.
       ...it will take years to use up all that capacity; the price of lead will go nowhere-which means that a bear market is under way.
       Your personality makes a difference. You have to look into the mirror and be absolutely candid about your own attitude toward risk, your ability to admit to having made a mistake, and your willingness to stray from the herd.
       Almost every time I've made serious money, it’s been by heading in the opposite direction of the crowd.
       I, for example, am the world’s worst trader. The best traders are maestros of timing. Knowing when to get in and get out, they enter and exit markets fearlessly. Over decades as an investor, I have learned that the best way for me to make money is to find something cheap that I like, take a position, and hold it for the long term. I’m a lousy trader, and I avoid ‘short-term’ investments.
       ...the smart investor looking into a copper company first has to examine the supply demand dynamics of copper.
       ...the returns from commodities were three times thos eof companies producing those commodities.
       ...indeed businesses of every type, will do better in commodity-rich nations than in countries that are short of natural resources. Currencies will also perform better in nations exporting rather than importing commodities.
       ...personally, I am not a big fan of purchasing options, most of which end up as losses.....The CME actually examined expiring exercised options over the three year period from 1997 through 1999 and found that an average of more than 75% of all options held to their expiration day ended up worthless. The odds thus are with the sellers of commodity options, who get to keep all of those expired premiums. It is definitely another way to profit from commodities, and I often sell options.
       The only certainty in futures trading is that prices change.
       ...basically successful hedgers have the knack of protecting one investment by making another.
       Hedging is a defensive move.
       The task of speculation is simple: Pick a direction in the market and hope it goes that way.
       Sometimes traders sell short without a good reason. They simply feel a big decline in their bones.
       While shorting hysteria is usually correct, I recommend also trying to have good fundamental reason for believing that the price is likely to decline.
       ...And every speculator will get it wrong at one time of another.
       My general rule of thumb for shorting is: I don’t like to sell something short unless it’s unbelievable expensive....And I mean unbelievable. I've shorted lots of things in my life that were expensive, only to see them get more expensive.
       ….futures trading is a humbling vocation. Every trader must come to terms with losing, because all traders lose. In fact, most traders lose most of the time. It’s the bottom line that counts-winning more than you lose. But since losses are unavoidable one other primary principle of trading is to limit your losses.
       ...and this is why most commodities traders end up losing their trading capital. (excessive margin trading and lack of stop loss)
       And once you actually begin trading, you must be absolutely clear about how much you stand to lose from a given contract should it go in the opposite direction that you desire.
       Spending too much time staring at the commodities tape can be dangerous to your health-emotional as well as financial.
       I’ve known few people who have gotten rich off technical analysis.
       ...China will become truly great when it will make its currency convertible.
       While many still insist on seeing the big oil companies of the Arabs or combination of both behind every spike in oil and gasoline prices, oil has become bigger than the corporations and thee nations that produce it. Everyone involved is at the mercy of supply and demand, and will continue to be, no matter who tries to control the market.
       In the real world, the once ‘unpredictable’ of war and terror have become a predictable part of life...
       The commodities investor must live in the real world of supply and demand-the main mover of prices.
       Some research organizations: British independent energy-analysis firm Douglas-Westwood. Oil analyst Groppe, Long & Little. PFC Energy. Simmons and Company International. Cambridge Energy Research Associates. Centre of global Energy Studies in London. Society of Petroleum Engineers. The Oil and Gas journal. Geothermal Energy Association.
       ...the current commodity bull market will last until sometime between 2013 and 2022. Perhaps oil from Africa will be the catalyst to end the energy bull market and then the overall boom in commodities.
       ...Asia’s demand will double within next 6-12 years.
       The demand for oil in China-and in the rest of Asia-will rearrange world politics.
       The sun generates an average of 200 megawatts of energy on the earth each day-enough to power the current population of the world for the next 27 years.
       A small increase in the speed of a wind turbine generates significantly more power....wind is becoming a competitive energy source with the price of ol over $50.
       Estimated to be the fourth -largest energy resource worldwide after coal, oil, and natural gas, bio-energy is stored in any biomass resources or any renewable organic matter from plants.
       Geothermal energy potential in the top six miles of the earth’s crust is estimated to be equal to 50,000 times the energy of all known oil and gas resources in the world. They are hot water and steam, trapped beneath earth.
       Nothing goes straight up every month.
       In modern times gold mines were first discovered in California in 1848.
       ...in my opinion, in the long term the dollar is likely to continue moving downward.
       There has been no outside audit o gold in Fort Knox, USA.
       These days, industry and dentistry are the biggest consumers of gold- about 11 percent of total demand.
       There was lots of ‘bullish’ talk about gold in the press, where memories are short on what a real gold bull market looks like...
       Investment biker, published in 1994
       ...But no wise investor should buy gold only in anticipation of the Apocalypse. Own some perhaps as an insurance policy...
       I am thus inclined to counsel a new Alchemist’s Dream for the current commodities bull market: The person who figures out how to turn gold into lead is the one who’s going to get richer than Croesus-at least until the Apocalypse arrives.
       ...lead has been branded as poisonous killer...
       ...as every empire tends to do, more likely as a result of occupying too much territory too far away with too many troops.....USA with troops now in more than 100 countries...
       Lead is not a popular business in which to be. And for that reason among others, lead prices are likely to rise.
       US Geological Survey Yearbook
       The International Lead and Zinc Study Group
       Lesson from Lead: Decreased demand or even a slowdown of economic growth does not necessarily mean a bear market-not if supplies are decreasing faster.
       US has protected domestic sugar market at a two or three times the world price
       The American Sugar Alliance
       US pay out roughly $5 billion and EU pays out $2 billion as agriculture produce subsidies.
       1981 was the previous bull market in commodities
       Historically, nearly everything goes up in every kind of bull market, whether its company shares, commodities, or apartments on Park Avenue.
       Sugar beets account of world’s 25% of sugar production.
       Sugar sector was deregulated in 2000 in Brazil.
       In 1981, the US Food and Drug Administration approved the artificial sweetener aspartame...
       Important Commodity Indices: Reuters CRB Futures Price Index began in 1956, Goldman Sachs Commodity Index, Dow Jones -AIG Commodity Index, RICI-Rogers International Commodity Index
       Luck always follows the prepared mind.
       You will know the end of bull market when you see it, and especially once you have educated yourself in the world of commodities and get some years of experience under your belt. You will notice increases in production and decreases in demand. Even then, the markets often rise for a while.
       Bull markets always end in hysteria.
       Yale School of Management, Centre for International Finance, ‘Facts and Fantasies about Commodity Futures.
       Yale School of Management Research confirms that- During the 1970s, commodities futures outperformed stocks; during the 1980s the exact opposite was true-evidence of the ‘negative correlation’ between stocks and commodities that many of us had noticed. Bull markets in commodities are accompanied by bear markets in stocks, and vice versa.
       ...without commodities no portfolio could be called truly diversified.
       I was eager to point out that every 30 years of so there have been bull markets in commodities that these cycles have always occurred as supply and demand patterns have shifted.
       Commodities have never gotten the respect they deserve.
       JR was convinced of a bull market is underway in commodities in Aug 1998. He has said at one place in the book that this bull market will run up a decade more. The book was written in 2004.
       ...by studying just a commodity or two one began to see the world anew.
       ...literally person by person. Rather than advertising, Starbucks has tried to win new customers with discount-coupon offers and visits to office buildings.
       ICO- International Coffee Organization
       ...more coffee is consumed in USA than anyplace in the world.
       ...in that sense, coffee is more like a metal than a crop-it’s a commodity that takes time to come back on line.
       ...the history of bull market tells us that when a long-term secular bull is under way, nearly everything reaches its all time high.
       ...how to think about commodities markets-by looking at the big picture over decades...
       Brazilian Alcohol Exchange
       Economic Research Service, US Department of Agriculture
       ...certainty, remember doesn't exist in the smart investor’s world
       ...sugar prices stayed in the bear market for next 19 years...
       Johnny-come -lately= an expression used on Wall street for latecomer speculators
       ...how researching in one commodity might turn up some moneymaking possibilities in a different one...


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