Selling DBB Because I'm a Bonehead

By Joe Ponzio on June 18, 2009  |  9 comments

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.

How to Value a Commodity

By Joe Ponzio on April 27, 2009  |  12 comments

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.

What Affects Commodities Prices

By Joe Ponzio on April 27, 2009  |  2 comments

In general, there are four main factors that affect commodities prices:

• Supply & Demand
• Inventories & Stocks
• Currency
• Inflation

Let's go down the list to best understand their harmony. We'll start in a tiny, isolated town of farmers and families.

Investing in Commodities; Base Metals

By Joe Ponzio on April 27, 2009  |  1 comment

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.