Posted by: Aaron Pressman on April 25, 2006
It’s fun to be on the same page with a super smarty like Bill Miller, even if we are in the minority. In his April commentary distributed today, the man with the enviable record of beating the S&P 500 15 years in a row rails against the current flood into commodity investing, as I did in last week’s magazine (behind sub wall still, sorry). He writes:
Suffice it to say it wasn’t a steely eyed look at the data sets and time series that has galvanized the investment world into believing commodity prices are “set to soar,” and that they better move fast to get in before the big move. Part of the problem with the data is what the professors call sensitive dependence on initial conditions: it matters when you start the measurement period. If you start it in 1950 and end in 2000, it shows about 47 years of oscillation and three years straight up in the early to mid 1970’s. Since the last big move in the 70’s, for a couple of decades commodities did nothing, so despite all the data about non-correlation with equities, nobody cared.
When prices were down, people could cite good fundamental reasons why they shouldn’t go up, just as they can now trot out all the reasons for why they should continue to rise: insatiable demand from China, India and the developing world, 20 years of underinvestment in production capabilities, sources of supply are either depleted or in geo-politically unstable parts of the world, skepticism about the sustainability of the price move, greater capital discipline on the part of the companies who produce commodities, massive new investment demand which is permanent since it is driven by indexation and thus will not leave even if prices decline (want to bet on that last one?). There are more but you get the picture.
Here’s a link to the full PDF version. The larger lesson of course is that investing in what’s been hot for the past five years is generally not a good bet for the next five years. Those with shorter time horizons and momentum following genes (not that there’s anything wrong with that) can ignore the advice. In the meantime, go Bill! (and p.s. maybe you should sell Kodak now)
(Updated 4/26 with link to full commentary)