Book Review: Hot Commodities: How Anyone Can Invest Profitable In The World’s Best Market by Jim Rogers

Jim Rogers has made a name for himself sniffing out value when in oft-neglected corners of the market. In the early 70′s, that meant commodities at a time when the nifty-fifty blue chips were considered indestructible. Rogers was ridiculed, but the oil shortage and ensuing high inflation proved him correct. In the early 80′s, just as commodities were at their peak and the toast of Wall Street, Jim Rogers saw the writing on the wall and moved out of commodities and into stocks, which at that point hadn’t made anybody any money in over a decade. Once again, the ridicule gave way to praise when Rogers was proven correct by the subsequent bull market in stocks.

Now, after over 20 years of above-average returns in the public equities market, Jim Rogers says it’s once again time to invest in “things” such as sugar, copper, and oil.

The Start Of The Great Commodities Bull Market

Published in 2004, Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market lays out Rogers’ thesis that we are in the beginning stages of a great, decades-long bull market in commodities (lasting until 2015-2020 at least). Rogers expertly conveys his reasoning for believing not only does the current bull market in commodities have legs, the laws of supply and demand actually ensure commodities will continue setting new highs for years to come.

Rising Demand And Declining Supply On The Horizon

Most commodities are about to enter a period of supply outpacing demand according to Rogers, in large part due to rapidly increasing demand not only from China but the rest of the developing world. The bull market started sometime in 1999 and is likely to continue until at least 2015, if Rogers’ calculations correct.

So if prices are going higher, why don’t companies just produce more of it? The simple answer, according to Rogers, is that they can’t. At least not quickly. Consider that it takes 3-5 years for a new coffee tree to start producing beans and as many as 20 years for a new lead mine to come online and you’ll begin to under why producers can’t just turn on the spigot: it takes a long time for the spigot to warm up!

Since most investment in commodity production takes a while to bear fruit (at least a year or two, in the most optimistic of scenarios), prices are bound to continue rising in the meantime. After all, the prospect of larger coffee crops in 5 years does little to fill my cup tomorrow. If I want coffee tomorrow, I’m going to have no other alternative than to pay whatever is the going price.

In Hot Commodities Rogers devotes an entire chapter of in-depth analysis to a few of what he feels are the more promising commodities over the next decade, including lead, oil, sugar, and coffee. Interestingly, Rogers feels that while gold is likely to perform decently in the coming bull market, he doesn’t think it will be one of the big movers and doesn’t advise investing in it (I too discourage investing in gold). In fact, he devotes an entire chapter to dispelling the mythology of that little yellow metal.

How Do I Trade Commodities, Anyway?

While Rogers firmly believes small individual investors are capable of doing well in the commodities futures market if they do their research and avoid leverage, he agrees that investing in commodities via an index fund is the best way for the average investor to cash in on the coming bull market. To that end, he created the Rogers International Commodities Index fund; however, it is based in Ireland and somewhat difficult for Americans to gain access to.

Unfortunately, very few commodities-centric mutual funds exist. Probably the most accessible commodities fund available to small investors is the Pimco Commodity Real Return Strategies Fund (PCRAX), but it suffers from an unbearably high expense ratio. Conversely, the Dow Jones-AIG Commodity Index ETN (DJP) sports a reasonable expense ratio, but suffers from the structural disadvantages inherent in the Exchange Traded Note format (an argument for another day, but suffice it to say your investment could easily go to $0 in any ETN). Due to the lack of availability of a reasonably-price, well-diversified commodities mutual fund, I’ve had to put my plans to devote 10% of my asset allocation to commodities on hold. I’d love to invest in commodities, but can’t justify taking the plunge with any of the products currently on the market.

Who Would Benefit From Reading This Book?

I think understanding the dynamics of what drives the market of tangible commodities will benefit pretty much any investor who takes the time to study it. This book is an excellent primer on how to interpret the basic supply-and-demand factors of several of the most commonly-traded commodities and as such comes highly recommended. Could a novice take what’s written here and make a killing in the futures market? No, of course not. But Rogers does a good job of explaining how supply and demand works in the real world, which I think is a good lesson for everybody.

Buy Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market from Amazon.com.