March 20, 2008

Commodities Big Adjustment

Commodities have been on a tear lately and just over the last two days they have came down hard. For those who invested over the last year or longer the correction do not mean much, as you were up multi fold the decline of the last two days. But for those who got scared of the markets over the last two months and jumped on the commodities band wagon you paid dearly.

The speculative element of commodities is very hard to analyze or comprehend. It appears suddenly and disappears as fast as it came. That's why I am not a big fan of "speculating " in commodities or commodities business. I do not consider buying gold as an investment, it mere speculation on its future price due one reason or another.

If you think about it why would you invest in a company that has no control over the price of what it is selling or its ability to create demand for its products for that matter. One of the most fundamental aspects of value investing is to find companies that is free to pass along increase in costs to its customers and to expand its markets. Commodity producing companies are a miss on both aspects. They can not price their products at all, it is left to market forces. Also commodity producing businesses have no ability to increase demand for their products by executing on their business strategies, primarily demand is left for economic forces that is outside of the company control.

I do not see commodity as an investment from any aspect. Value investing in commodity producing stocks is an oxymoron sort of speak.

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