Silent Archimedes

Book Review: Hot Commodities

Posted by silentarchimedes on June 17, 2008

Book Review: Hot Commodities

How Anyone Can Invest Profitably in the World’s Best Market

Author: Jim Rogers

WHY I READ THIS BOOK

This is my second book review on the precarious economic situation in global economics, specifically in America. The first one was The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel, by Stephen Leeb. Now, under the assumption that America is on the cusp of a long recession or some sort of economic crisis, I decided to read a book about a neglected investment area that already is in the midst of a long bull market, commodities. Commodities are the raw materials, natural resources and hard assets that prop up everything in our quality of life, from food such as corn, sugar, and pork, to infrastructure such as copper and rubber, to energy such as oil and natural gas. Without commodities, and a speculative market for it, we would be seeing drastic regional and daily price differences of everything, ranging from televisions to groceries to jewelry.

One funny thing I noticed with these books about economic crises is the required two stage title, the what and then the how. The Coming Economic Collapse: How you can thrive when oil costs $200 a barrel. Hot Commodities: How anyone can invest profitably in the world’s best market. Crash Proof: How to profit from the economic collapse. Mobs, Messiahs, and Markets: Surviving the public spectacle in finance and politics. All the titles could’ve done without the second title. It makes it a little juvenile and commercial, but I won’t judge a book by it’s cover.

THE AUTHOR: JIM ROGERS

I had heard of Jim Rogers before, but not much about his past. He came to fame in the 1970s where George Soros and him created the Quantum Fund that far outperformed the S&P in the high-inflation oil-crisis 1970s. The Quantum Fund returned over 4200% in that first ten years while S&P returned only 47%. After retiring in 1980, he went on to travel the world many times over… literally. He set the Guinness Book of World Record in 1992 by motorcycling over 100,000 miles across six continents (he details in his earlier book Investment Biker). He has traveled across China multiple times. Then in 2002 he set another world record by driving through 116 countries and 245,000 kilometers with his wife in a custom-made Mercedes. His current claim to fame is creating the 1998 Rogers International Commodity Index and predicting the current commodities bull market in 1999. This was during the height of the dot com when commodities were at multi-year lows and in a major bear market. He has also been a guest professor of finance at Columbia University, a moderator of finance shows on CBS and FNN. Like Soros, Rogers has also moved his entire family to Singapore because of the belief that Asia is the next financial epicenter and America is due for a major economic crisis.

REVIEW

“Commodities get no respect.” The first line in the book. I’d have to say I agree with him. I’ve been investing for less than 10 years and no one talks about commodities the way they talk about stocks and mutual funds. I guess most people only talk about automobiles like Corvette and Accord (stocks) or General Motors and Honda (mutual Funds). Unless you are a true car enthusiast, you leave the details about engines, suspension and chassis to the experts. However, we know that the materials that make up a car or a company’s products are what makes them run and exist. In short, Rogers pretty much expresses in simple terms that the supply and demand fundamentals of most commodities are way out of whack (his words). Supply is on the short side and demand is increasing.

The flow of this book is very good. He first builds his credentials. Then he talks about the history cycles of commodities, specifically the fundamentals of supply and demand. A step back with a primer on commodities and the exchanges that exist is next. Finally, it’s chapter by chapter of specific commodities that stand to gain in this bull market.

As with all these books, there is always an overt or covert “I told you so” in the writing. It is understandable because the authors are usually taking a contrarian viewpoint and in order to build credibility they have to show that their previous contrarian positions have panned out. Rogers is no exception when he describes the track record of his futures picks. Having the Quantum Fund with Soros as part of your credentials sure doesn’t hurt. What is interesting is that Rogers is at an age where he really doesn’t have to prove anything to anyone. His writing style clearly shows this. It is very relaxed and simplistic. He talks about his past and trips around the world in a casual sense as if everyone can do it. He also refers to his mistakes and weaknesses as humourous because they turned out for the better. His attention to detail and research is remarkable.

The primer on commodities is very useful for those that are beginners in the area. Although some might find it too simplistic, “commodities are equivalent to futures“, I found it a necessary part of the book. Since this book was written in 2004, it was unfortunate that current commodities-related exchange-traded funds (right) are not mentioned. I would have been interested to hear his opinions on the Energy Select Sector SPDR (XLE), the Goldman Sach’s iShares GSCI Commodity-Indexed Trust (GSG) and Market Vectors Gold Miners ETF (GDX), amongst others. He does mention that the GSCI (GS Commodity Index) is weighted incorrectly, and thus the creation of his own commodity index.

In short, the commodities he talks about in detail are mostly nothing new. Everyone knows that China is tilting the balance of supply and demand in many key economic areas, such as oil and steel. However, Rogers has been preaching this since 1999 when oil was $10 a barrel and Asia had just overcome the 1997 financial crisis. The last thing anybody was thinking about was a commodity bull market. One viewpoint that was interesting was his lackluster enthusiasm of gold as a commodity. Although he maintains a small stake in it, he views it as something that doesn’t always follow the fundamentals of supply and demand, and that it’s historical cycles are harder to predict. He’s still bullish on it, but not as bullish as more obvious ones, such as oil and certain other metals. His other interesting viewpoint is on India. His first-hand experience in the country leads him to a different viewpoint than the public majority.

Each chapter about a commodity is interesting to read. He describes the importance of it in everyday life and markets and the historical cycles of it. The set up is to show why he thinks it is time again for that particular commodity to be a high-flyer.

Although this book was published in 2004, it is well-known that Rogers has been predicting the current commodity bull market since 1999. Let’s look at the performance of some of his suggested commodities since 1999 and 2004.

Light Crude Oil

Approximate price/barrel and return since 1999

1999 price: $15

2004 price: $35…..133%

2008 price: $130…..767%

Although there are signs of a bubble since 2007, high oil prices are clearly here to stay.

.

.

Gold

Approximate price/oz and return since 1999

1999 price: $270

2004 price: $400…..48%

2008 price: $900…..233%

Rogers is not as enthusiastic about gold. Although it has strong returns, it’s not as strong as the other commodities.

.

Platinum

Approximate price/oz and return since 1999

1999 price: $380

2004 price: $800…..111%

2008 price: $2000…..426%

Low supplies with increasing demand makes this commodity a high-flyer.

.

To be fair to him, I will leave the rest of his suggestions to readers. However, in looking at the monthly returns of most commodities, it is quite apparent that Jim Rogers is on the spot. Check out other phenomenal returns here.

VERDICT

The writing style of this book is so laid back it borders on conversational. However, it works for Jim Rogers because he appears to truly enjoy life like a kid. His wild-child trips around the world are not just rich-man-spending-money trips, but a big part of his research. His first-hand experience in living different cultures surely helps his perspectives. He is known for impeccable research, with simple logical explanations. If you believe the commodities bull market is far from over, as Rogers does, I suggest picking up this book.

Rating: 9 out of 10 corn ears

POLL: Have you invested in commodities (not stocks) since 1999?
1) yes
2) yes, but only gold
3) no, but I want to
4) no
View Results

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