Commodities Investing the Jim Rogers Way

I asked a portfolio manager yesterday what he thought of the financial crisis, and he quickly replied, "I had nothing to do with it." Although good for a chuckle, the statement also contains a timely lesson for every Fool: Be defensive.

When economies get into trouble, many investors seek the relative safety of hard assets. Following the late-summer launch of the Market Vectors RVE Hard Assets Producers ETF (AMEX: HAP  ) , investors now have access to a broad basket of commodity-related equities tracking a benchmark index which commodity expert Jim Rogers himself helped to construct.

Commodity equities have been anything but safe lately, as these sectors have been taken to the cleaners. This monstrous correction comes as no surprise to Rogers, legendary co-founder of the Quantum Fund. In Jim's words:

We have had eight or nine periods of forced liquidation over the past 100 to 150 years wherein everything was liquidated without regard to fundamentals. This is such a period. ... Historically, the things which have come out best on the other side are things where the fundamentals have been unimpaired. Commodities are the only thing I know with unimpaired fundamentals.

I would augment that statement by suggesting that some commodities will be slower to rebound than others. Nonetheless, this exchange-traded fund (ETF) contains a formidable list of names among the top 10 holdings, with a notable emphasis upon oil and agriculture. Fools who believe that oil will resume its bull run will appreciate the exposure to ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) .

For those nutty enough to think that food may be important in the future, the fund includes familiar names from the presummer agriculture rally, including Potash Corp. of Saskatchewan (NYSE: POT  ) and Deere (NYSE: DE  ) . Unfortunately for this Fool, at more than 8% of assets, the current largest holding is Monsanto (NYSE: MON  ) . After reading this article back in April, I vowed never to own shares.

While I have deep respect for Jim Rogers, and I do not doubt that the Market Vectors ETF will reverse course and ultimately outperform the broader markets for a while, I believe that investors could do even better with an independent approach capitalizing on the range of resources at The Motley Fool. The Motley Fool Income Investor newsletter service -- with recommendations like Petroleo Brasileiro (NYSE: PBR  ) , which also appears in the Rogers index -- can be a great place to start. Try Income Investor free for 30 days.

Further Foolishness:

Fool contributor Christopher Barker thinks his head is harder than most assets. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns no shares in the companies mentioned. Petroleo Brasileiro is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a granite disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 24, 2008, at 9:20 PM, gamma65 wrote:

    The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research by our firm, Agcapita Farmland Investment Partnership (Calgary, Canada based agriculture private equity firm – www.farmlandinvestmentpartnership.com) shows investors must be prepared to rotate into asset classes with different characteristics. During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland.

    - Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms);

    - Cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return); and the

    - S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)

    We believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:

    - Corn is US$ 4/bushel currently compared to US$16/bushel in 1974,

    - Wheat is US$ 6/bushel currently compared to US$27/bushel in 1974

    - Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981

    Another interesting metric is the long-term average ratio of the Commodities Research Bureau Index versus the S&P 500 which is currently around 1.5 times. Simplistically, this ratio indicates how much S&P 500 stock you can buy with a fixed basket of commodities. Some important points:

    - During the commodity bull market of the 1970s, the ratio was consistently higher than 2 times for over 10 years – it peaked at almost 4 times.

    - The ratio is currently at around 0.5 times - significantly below the 1.5 times long-term average, just slightly above the 0.15 all time low reached in 1999/2000 and still very far below the almost 4 times multiple reached in the last commodity bull market. We still appear to be at an all time low relative valuation between “hard assets" versus "stocks.”

    - If history is a guide, the ratio of hard assets to stocks will have moved much higher before this commodity bull market is over.

    - How? Stocks will continue to fall and/or commodities will continue to climb – most likely a serious combination of both as investors, fearing inflation, rotate out of stocks into commodities – the cycle of “inflation, rotation, hard assets”.

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