As I mentioned in this post, I got rid of DBB — the base metals ETF. Admittedly, I'm hanging my head in shame — not because we lost money (actually, we made money) but because I made a stupid judgment mistake that cost us opportunity. (Fortunately, there's a lesson in here.)
My mistake was not in my evaluation of the commodities or reasoning for buying them. The mistake was that I bought an investment that grouped the three together instead of buying a virtual certainty.
I can't believe that it has been nearly two years since F Wall Street was originally launched on June 25, 2007. And what a two years it has been!
Since our launch, we saw the S&P 500 climb to an all-time high in October of 2007, only to watch it plummet nearly 58% to a level first seen in May of 1996. Some of the causes of the drop were highly predictable. Some of the events, such as the September 2008 disaster, were completely unpredictable. And through it all, we were largely, if not entirely, invested in individual stocks.
I'm heading out to Omaha for the Berkshire Hathaway annual meeting. Though I'm still trying to figure out Twitter, I'll do my best to post updates on my Twitter page here.
If you're going to be in Omaha, drop me a line via e-mail and we'll meet up.
There is no discounted cash flow method for commodities. They don't pay dividends or bear interest rates; they don't generate cash. Long-term investing in commodities is all about finding opportunities where supply and demand are out of balance and the price is low relative to where it "should" be on an inflation adjusted basis.
With no external forces acting on a commodity price (ie., supply and demand are in balance and the currency doesn't change), commodities prices would move in lockstep with inflation. A 3% increase in inflation would result in a 3% increase in commodities prices.
Of course, this is the real world; so, supply and demand aren't always in balance, currencies fluctuate, and speculators push prices up and down regardless of supply, demand, inflation, and currency fluctuations. And that messes with prices.
Mention the word "commodities" and one of three images usually pops into mind. Some people immediately think of Trading Places, of Louis Winthorpe and Billy Ray Valentine cornering the orange juice market and issuing a false crop report to the Duke Brothers, leaving the Dukes high, dry, and utterly broke. (The story has a happy ending. The Duke Brothers make a comeback in Coming to America.)
Others maintain a lovely blank stare.
And then there are those that immediately think of pork bellies, and know a guy who knows a guy who knew a guy that lost everything trading pork bellies.
The truth is that commodities don't have to be — in fact, shouldn't be — scary. Especially if you have a long-term perspective on things. Sadly, they're merely misunderstood. To add to their elusiveness, most brokers and financial advisors aren't licensed to buy and sell commodities; so, Wall Street has a bias against commodities.
I don't plan to change everyone's opinion on commodities; but, this 3-part article should shed some light on what goes into long-term investing in commodities.
I appreciate your patience with the lack of posts here on F Wall Street. As you may have noticed from this comment, I had the honor of being invited to speak to the MBA students at Howard University in Washington DC on March 13th. I'm working on getting the video from that speech (about an hour long) and will post it here when I have it.
One of the topics I covered was basic economics. More specifically, the two laws of economics that can't be broken, and that are paramount to investment success and thinking about investing:
Let me continue this economic discussion, though I also have to get back to a few other topics as well. There is a lot of chatter as to whether we are in a recession or depression. Since November of 2007, Wall Street has been calling bottoms to this market, first setting their sights on Dow 13,000, and then incrementally lowering their targets by 1,000 points as time marched on.
Optimism and pessimism have no place in investing. Let's look at the economy from a realistic perspective to see why this recession will be nothing like the Great Depression.
In December of 2007, as Apple was approaching $200 a share, you couldn't say a word about it for fear of backlash from the Apple investment community that insisted it was going to $600 a share. Today, Nouriel Roubini and Peter Schiff are considered gods for predicting the economic turmoil, and anyone discrediting their teachings should be burned at the stake. Well, get the gas and matches, because I have to say that Peter is full of Schiff in his latest article.
A broken clock is still right twice a day. The problem is this: If you look at that clock at that exact "right" moment in time, you should not automatically assume that the clock is always right. Warren Buffett came out recently and said how "dumb" he was in 2008. Should we then assume that Buffett is doomed to be eternally wrong in the future?
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