Commodities – The Next Tech Stocks?

Moira Herbst has written an article that I found on It was too rich of an opportunity for me to pass up and show just how much unwarranted skepticism there is towards commodities as an asset class.

I’ll just quote and comment:

“With the prices of gold, corn, and other commodities on the rise, marketers are luring new investors. But the risks are high”

Risk. I fail to see the risks in owning food we eat, money we trade and assets that actually incorporate intrinsic value.

“Commodities seem to have become the new tech stocks.”

Have they now? Seems to me everyone is still talking about stocks like Microsoft, Apple and Google. I haven’t been offered a great mining stock at a barbecue or some gold bullion for my birthday in quite some time.

“Commodities are a really great way to lose money,” says David Wyss, chief economist for Standard & Poor’s, which like BusinessWeek, is a unit of the McGraw-Hill Cos. (MHP).

Commodities also seem like a great way to make money, especially before the Chief-Economists-come-Gold-mine experts crash the party!

“You’re better off playing poker in Vegas.”

Well good luck to you David. We can’t all be right. As a matter of fact its precisely because of people like you that I have so much faith in the future for commodities. And I would strongly suggest he read Ben Graham’s definition of the world “speculation”. You can make more money in Vegas than you can on Wall Street if, and only if, you have your money in the right places and can think for yourself, something very few economists seem to be doing nowadays.

“Leverage Can Be Lethal”

No kidding! But do consider that Tech stocks often supported price-per-earning ratios of over 60. You would be paying a premium of over 60 times earnings. By contrast with commodities the leverage is in the favor of the investor paying only 5% of the issue. One doesn’t have to take on the extra risk. Yes, it could go both ways, like anything.

“The stock market tends to go up over time, though, of course, there are booms and busts. Not so with commodities, where prices depend on a complex nexus of supply and demand, from geopolitical events and the weather to speculation on daily news headlines and analysts’ technical charts.”

Between the years of 1966 to 1980 stocks practically went nowhere gaining on average 0.4% a year. By contrast commodities during those years rose by over 800%! And supply and demand are the very principles that run our markets. Unless of course the author is unfamiliar with the fact that stocks actually represent real companies with real earnings that work on… well, supply and demand.

“A trader navigating this minefield needs a deep understanding of these dynamics because the competition can be cutthroat. “Commodities trading is a zero-sum game,” says Wyss. “The only way you make money is to be smarter than the other guys doing it. Since they’ve been at it a long time, your odds aren’t good.”

I’m not understanding. How is trading in stocks any different? Unless of course we have reached such a climax in stocks that people have come under the impression that the tide raises all boats… for good.

“Short-term commodities trading and speculation are the most dangerous.”

Short-term trading or speculating on anything is the most dangerous. It is not commodities that you should be wary of but yourself. Anything can become overvalued. Think Tulip Bulbs in the 17th century, Florida Real Estate in 1926, Gold in 1980 or Asian stocks in the 90s.

“To put their money into commodities is similar to the marketing behind day-trading in the 1990s, when many small investors tried to trade stocks daily and ended up losing large sums of money. But he says the current trend could be even worse.”

Let me tell you something, dear readers. Many people who are investing in stocks for the short-term are going to be feeling awfully similar to those same Day Traders of the late Tech bubble. Unless you bought into the market at fair prices and intend on holding onto those shares receiving dividends while commodities boom over the next few years, these next few years aren’t going to be that exciting.

O’ how the sentiment of man changes with time. One things remains certain…

The masses have never thirsted after truth. Whoever can supply them with illusions is easily their master whoever attempts to destroy their illusions is always their victim.
Gustave Le Bon from his 1896 book “The Crowd”

Commodities – The Next Tech Stocks?
Moira Herbst
February 20, 2007
Business Week


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