Book review: The Little Book of Commodity Investing
Every Sunday, The Simple Dollar reviews a personal finance book or other book of interest.
Commodity investing is one of those areas of personal finance that I simply don’t know much about. When I think about commodity investing, I think of listening to an AM station where a dry-voiced announcer is saying, “February soybeans two thirty two and a quarter up two and a quarter…” with small variations for half an hour.Skip to next paragraph
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Still, the idea of investing in something tangible holds some interest for me. Commodities are tangible, material things, often used in the manufacture or production of other things. Instead of owning a share in a corporation that exists on paper only, you own a thousand bushels of soybeans. That has direct appeal, even if it’s not something I deeply understand.
This week, I decided to correct that lack of understanding by reading The Little Book of Commodity Investing by John Stephenson, the latest book in the wonderful Little Books, Big Profits series. I like the series because it offers gentle introductions to specific investing topics from individuals who are actually involved in that field. John Stephenson is a very experienced portfolio manager who has been in commodity investing for a very long time – he knows his stuff.
This book largely boils down to a sequence of short chapters each dealing with a particular flavor of commodity investing – oil, foodstuffs, natural gas, precious metals, and so on – with a chapter on each end to bookend these pieces.
One | Calling on Commodities: Why Commodity Investing Is a Savvy Bet
The big argument in this opening chapter is that the coming years are going to be a boom for commodity investors as the tendrils of globalization dig deeper into nations like China, India, Brazil, Russia, and so on. These nations are going to be building infrastructure like mad and the ingredients to build that infrastructure, such as steel, oil, and natural gas, are going to be in high demand. This will also give rise to a huge global middle class which will result in consumer goods being produced and purchased at a huge rate, and those goods will be made from – you guessed it – commodities.
Two | Gettin’ Goin’: Companies or Commodities?
Unfortunately, directly owning commodities really isn’t a convenient option for most people. Do you have a place for 1,000 bushels of soybeans or 500 50 gallon drums of oil? For most people, the answer is a resounding “no.” The solution is to invest via a futures contract, in which a producer agrees to sell you some amount of a commodity at a certain price on a certain future date. So, for example, you might agree to a contract for 100 barrels of oil today for $30 a barrel, with the oil to be produced in six months. In six months, you then have 100 barrels of oil which you can sell to someone who will actually use it for the going market rate for that oil – it might be $35 or it might be $25. The chapter describes this market in detail with a tone that makes it quite understandable.