Secrets of Success: Help yourself - and go for commodities
Saturday 05 February 2005
Having recently been asked to put together a list of the 10 best books about investment, one thing immediately struck me about the resulting list (which can be found at www.intelligent-investor.co.uk). It is that the great majority of the best books on my list originate from the United States; given our long tradition of managing money as a profession, and being a highly literate nation, it is surprising how few really good books about investment we have produced.
It may have something to do with the fact that the market here is relatively small compared with that in the United States; if few good investment books are produced, it is equally surprising how few people ever bother to read one at all. The self-help tradition, once such a strong feature of our culture, is much more developed on the other side of the Atlantic.
For that reason, I wonder how many people will get round to reading Jim Rogers' new book about commodities, recently published in this country by John Wiley. Rogers, some readers may recall, is the former partner of George Soros who retired from active money management at the age of 37, in order to look after his own money, do some teaching and travel round the world on a motorbike. He is an engaging and interesting character who, purely incidentally, once coxed in the Boat Race while a Rhodes Scholar at Oxford.
His commodities book is first class and one that I would strongly recommend, not least because it is admirably clear and (to my mind) persuasive. The Rogers thesis is that commodities are the forgotten asset class that all investors now need to start boning up on. He believes that commodities ended a 20-year bear market in 1998 and are now entering a new secular bull market that will probably continue for at least another decade, while stocks, bonds and property - which have had their great bull market - will do relatively poorly.
Although many people have latched on to the recent strength of two of the more visible commodities, gold and crude oil, there could well be just as much action, says Rogers, in some of the other commodity classes that nobody ever thinks about these days - the likes of lead, sugar and coffee. One of the purposes of the book is to explain to private investors why it is not too late to jump aboard this trend. Another is to explain why investing in these commodities is not as fearsomely difficult or risky as many suppose.
Thanks to modern technology, it is now possible to buy index funds that track commodity indices (though beware which index you are tracking, as their composition and behaviour vary considerably). The most important point he makes, however, is that history always reveals lots of moneymaking opportunities that are visible in retrospect but rarely clear at the time.
While most investors today are still focused on the stock market and property, which is where most of the bull market action has been for the past 25 years, the odds are that the best future returns in the coming generation will come from elsewhere. Most commodities are in a phase when demand is rising and supply is short, thanks largely to a lack of investment during the long, barren years of falling commodity prices, and the case for a sustained new bull market looks robust, especially as bringing new supplies onstream will take years, not months.
Bill Miller, arguably America's best-known fund manager, wheeled out another example of the power of numbers at his firm Legg Mason's London investment conference this week. Miller is the only mainstream mutual fund manager in the States to have beaten the S&P 500 index every year for the past 14 years.
Miller is bullish about the stock market and, unlike Jim Rogers, thinks most people have been overdosing on pessimism about shares (for reasons that I hope to analyse in more detail in a future column). After making his case that this will be a good year for the stock market, he alluded at the end of his talk, with tongue very much in cheek, to the anomaly of the performance of the US stock market in years that end in five.
If you track the performance of the market back to 1885, years that end in five not only produce the highest average annual return (a striking 30.7 per cent), but have invariably produced a positive result, with 12 up years and not one down year. This effect is so powerful that it dwarfs another phenomenon that is often alluded to, the fact that years following a presidential election are often difficult for stock markets (for the obvious intuitive reason that the first year of new terms is frequently the one when tough political decisions can be and are taken).
According to Legg Mason's analysts, years that end in five and also are the first year after an election have always produced at least a double-digit return, although the average performance of the market in those six cases is 25.5 per cent per annum, slightly less than the average return from the whole series of years that end in five.
Readers will, I am sure, be keen to know the ranking of the years in a decade. Years ending in 5 are the best, followed by those ending in 8, 9, 4, 6, 3, 2, 1, 7, 0. Years ending in 0 have been positive only four times out of 12 in the past 120 years.
Statistically these figures mean nothing, but if I were a fund salesman, staring gloomily at the plunging level of unit trust and Isa sales, down 40 per cent last year, my guess is that this line of argument might well prove more persuasive than all of Mr Miller's other cogent arguments. Clinging to spurious data sequences is one of the most pronounced behavioural traits we all share.
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