SOME things are just too painful to remember -- like the 1970's. Sure, "Saturday Night Live" was funny back then. But Barry Manilow was king, pet rocks were hot and everyone who was anyone sported a white suit spun from petroleum distillates. As for investing, well, double-digit inflation, the energy crisis and the 1973-74 stock market meltdown made it, for most people, a decade to forget.
But there was one way to make big bucks in the '70's -- and like John Travolta, Jimmy Carter and the entire egregious Brady Bunch, it seems to be making a comeback. The trick, back then, was to invest in "stuff" -- art and real estate and diamonds, but especially the things that Wall Street lumps together and calls "commodities," like pork bellies and gold bullion and soy beans and barrels of oil.
After a decade when nobody would touch the stuff, some of the best brains on Wall Street are starting to buzz that commodities, not stocks or bonds, may well turn out to be the best investments of the late 90's. A few are expecting inflation to soar, and that's often when commodities prosper. But most investment seers cite other reasons for a commodities comeback, including the falling dollar, demand from countries like China and India -- and that some commodities are just plain cheap.
But one thing has not changed much since the 70's -- commodities remain a very hard game for the amateur investor to play. Traditionally, commodities trade in the futures and options markets, arcane arenas where timing is tricky and the costs can eat you alive. (In three days last month, one Connecticut man lost two-thirds of his stake -- mostly in commissions.) Pros, in fact, commonly assert that 70 to 90 percent of amateur investors lose money in futures and options -- with Hillary Rodham Clinton's success being the exception that proves the rule.
So it may sound as if Wall Street is planning a party and you're not invited. But if you buy the commodities story, and that's a big if, there are some admittedly imperfect but less expensive ways to act on your beliefs. And you can bet that if investing in stuff really takes off, the folks who brought you mutual funds will be quick to find a way to help you invest in commodities, too (for a fee, of course).
Of course, plenty of astute investors just do not believe commodities are poised for an upswing, and even some believers still suspect that stocks and bonds will be better investments. After all, commodities have been in a bear market that has lasted, depending on which thing you pick, from 14 to 23 years. In fact, over the very long haul, commodities have proved to be a pretty bad bet; according to Morgan Stanley, if in 1945 you had put your money in oil, copper, grains, livestock and the like, your returns would have trailed all other investments.
BUT at times commodity prices really cook. Everyone old enough to drive in the 70's remembers the oil crisis; between 1972 and 1981, the price of fuel soared more than 250 percent. But that wasn't all. Industrial commodities -- things like copper and aluminum and tin -- almost tripled, and food prices more than doubled.
And the late 1990's may present another golden opportunity -- at least that's the view of some seers. One is James Rogers, who in partnership with the trading wizard George Soros made a mint in the 70's. Today, Mr. Rogers is a professor at Columbia University, the host of a show on CNBC and the author of a financial guide cum travelogue called "Investment Biker."
As in the 70's, he said, there is too much money floating around in the world -- a sure recipe for inflation, some economists say. But another crucial factor in the inflation of the 70's, he added, was that the supply of raw materials dried up when African countries went from being exporters to importers.
A supply disruption is also likely today -- from the nations that made up the old Soviet Union, which are running out of stuff to export.
In general, he added, low raw-materials prices in recent decades have discouraged investments in new production. "I bet nobody has said they have a cannot-miss deal in a sugar plantation," he said, "and if anyone has come to you with a hot tin mine, I'd be surprised."
Demand for raw materials, gold and other commodities will also increase as "less developed" countries start to catch up. "The two billion people in India and China each use one barrel of oil a year, while in Taiwan they use 11 and in the U.S. they each use 33," said Mark Holowesko, president of Templeton, Galbraith & Hansberger Ltd., which manages the Templeton mutual funds.
Inflation weighs on the minds of money managers like William Fleckenstein, a principal of Olympic Capital Management of Seattle, which invests more than $1 billion. "People believe in stocks and bonds, and they believe in the chairman" -- Alan Greenspan, that is, of the Federal Reserve -- and his ability to engineer an economic slowdown that will spark neither inflation nor recession, Mr. Fleckenstein said. "The case for commodities is, What if everybody gets it wrong?"
Robert A. Beckwitt does not expect a surge in inflation, and he finds it hard to bet on the future of China and Russia. But as manager of Fidelity Investments' giant Asset Manager funds, he has made some commodity-linked investments as insurance, and suggests that 5 to 10 percent of a portfolio might belong in such investments.
"Inflation is low, and while it could go down to 1 percent, it could also go to 6 percent," he noted. "How do I invest and make money in a period when inflation goes from 3 percent to 6 percent? Commodities are one of the few things you know that correlate with inflation."
FINALLY, some investment gurus favor commodities simply because they have been beaten down for so long -- and Wall Street firmly believes that every dog, eventually, has its day. True, some commodity prices are not as low as they were just a year or two ago. Last spring, as investors started to believe the economy was strong and inflation might be rising, many prices shot up, particularly for materials used by industry (think copper and aluminum). The commonly used Commodity Research Bureau index of 21 items zoomed 10 percent in less than two months.
But that rally soon ran out of steam. Only cotton has continued to climb (each commodity moves on its own special circumstances, often including the weather). Overall, the index has gained just 3 percent in 12 months. That pattern of sharp gains followed by partial fallbacks, which analysts call a stairstep rally, is likely to continue into the end of the century, said William B. O'Neill, senior futures strategist for Merrill Lynch & Company.
Last year's price increases, along with the prospect of slower growth worldwide, have put a bit of a damper on enthusiasm for commodities at Goldman, Sachs & Company, the investment bank and brokerage that caters to companies and professional investors, which was more bullish last year. "Commodity prices in general are not in a bear market, and a few got rather rambunctious," said Abby Joseph Cohen, co-chairman of the firm's investment policy committee. Nevertheless, she suggests that clients put 5 percent of their portfolios into commodities.
Some money managers prefer to look at particular commodities. And in some cases they are finding very attractive bargains.
Michael J. Harkins, president of Levy, Harkins & Company in New York, is bullish on gold, oil and real estate, "because of the extreme lows that you can buy stuff for," he said.
Right now, it would be hard to find anything more disdained by amateur investors than commodities. "Going back, people did speculate more in commodities, but the game has changed now," said John Markese, president of the American Association of Individual Investors.
And frankly, that's the way it should be, say most financial planners. "I don't think individuals have any business playing the commodities game, because it's a suckers' game," said Jonathan Pond, who through his many television appearances and books serves as a sort of financial planner to the masses.
Most financial advisers recommend steering clear of the futures markets, which can prove treacherous even for experts.
FUTURES markets were set up in the 19th century to let farmers lower their risks by arranging at planting time the prices they would get at harvest. But the futures exchanges have evolved into places for very short-term speculation (indeed, the longest futures "contract" -- the security you buy -- lasts only a year).
For a small down payment, you can control a lot of something. Right now, an investment of less than $2,000 will let you trade more than $10,000 worth of crude oil. But if that $10,000 drops sharply -- to, say, $7,000 -- you will have to put up more money to cover the $3,000 loss. That is how you can end up losing far more than your original investment.
Another difficulty: it can be hard to bail out when you want to, like when the market is going down. There are strict limits on how much commodity prices can change in a day, "and if the market moves more than the limit, you can't get out," Mr. Markese said.
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In the mid of 1990's if you go to a bank to trade stock, the commission would be around 7%.
Take a example, I try to buy a $33 stock for 100 shares, it cost around 200 plus to make round
trade. it is 6% plus for commission. It is totally different from nowdays.
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Then there are the trading costs. Barry J. Lind, chairman of Lind-Waldock, a discount futures broker in Chicago, estimates that of the money his customers put up, 10 percent goes to commissions. Thus whatever they invest in has to rise 10 percent before they break even.
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A real case says a bad operator cost you more money on commission
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Among the shadier operators, the costs to investors can be far higher. Take the experience of the unfortunate man from Connecticut, who does not want his name used. He heard a radio commercial about the big profits to be made trading commodities (unleaded gas and orange juice appear to be the favorite come-ons), and after some discussion with a small brokerage firm, he opened an account with $18,000.
He bought options, which let you bet on future prices. His silver options went up, so his broker suggested selling, that same day. He did, but somehow the price wasn't as high as he had expected; after commissions, he ended up with a loss. He put the remaining money into copper, and after two days had a loss. After a third losing trade, in bond futures, he gave up. In less than a week, his $18,000 shrank to $6,000. And $8,000 of his loss went to commissions.
All of which helps explain why, if you walk into the office of a big, reputable broker like Merrill Lynch and say you want to invest in commodities, they may actually try to talk you out of it -- if you're lucky.
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It is a investment pool not mutual fund. Regulation is lighter. it's harder to find out how they are doing
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Or, if you insist, they may recommend what is called a managed futures limited partnership. These are somewhat like mutual funds that invest in commodities, but with some big differences: it's hard to get your money out and these pools charge very high fees (the managers get a big cut of any profits). Regulation is lighter, and it's harder to find out how they are doing, or even what they invest in; many can speculate in all kinds of futures, including bonds and currencies.
The other problem with managed accounts is that they focus on short-term trading gains, not long-term investments. For that, pros tend to turn to investments tied to the Goldman Sachs Commodity Index, which has a heavy weighting in energy and tends to move up and down with inflation. Carolyn Taylor, president of Weatherly Asset Management, which caters to wealthy individuals, said she is looking into bonds that move along with the index. Unfortunately for most people, these securities cost about $100,000. But Wall Street has some investment pools in the works that may let less wealthy people invest in these securities.
FOR most investors, the easiest answer to investing in commodities may be found in a mutual fund. While few funds invest directly in "stuff," quite a few specialize in the stocks of commodities producers. This has its drawbacks; Susan Bender, senior editor of the No-Load Fund Analyst Newsletter, points out that these funds tend to move more like the rest of the stock market, and less like inflation hedges. On the other hand, they are much less likely to wipe investors out.
In general, they can give a cautious investor a little exposure, and that may well be enough. Between 1977 and 1980, T. Rowe Price's New Era fund -- which invests in natural-resources companies, among others -- had almost triple the return of the S&P 500 stock index. In the late 1980's, things got tougher for this fund, but it was still an improvement over commodities themselves.
But now there seems at least the possibility that commodities will once more come into their own. Maybe not, but hey, hang on to that mood ring and the pet rock; they, too, may turn out to be worth a lot before too long.
