Commodities Rising: The Reality Behind the Hype and How To Really Profit in the Commodities Market

6

Commodity Strategies

There are countless ways to manage commodities investment positions in various price scenarios. Chapter 5 discussed various instruments that are available to investors interested in buying exposure to commodities. This chapter discusses some ways to use those instruments. I cannot and should not attempt to discuss all possible strategies. There are many to which I do not subscribe, so while I touch on a few of these, I am partisan in my description of them. I leave it to people who think they are wise approaches to defend these strategies and investment practices.

Let me start by outlining what I do think are wise approaches. At my core, I am a value investor. I like assets that are undervalued and show fundamental or economic reasons to expect a price increase. One must always be cautious about purchasing an investment simply because the price is low. How many investors bought Enron in the early days of its collapse, assuming prices would respond? Similarly, I looked at a bakery stock a few years ago, at the peak of the anti-carbohydrates diet fad, with the view that bakeries would come back in favor as that diet fad faded. The company I examined had its own problems, however, which suggested to me that its fortunes and share price might not survive and revive with Americans' taste for cake. That analysis, for one, proved correct.

So value investing is a start, but one has to make sure that there is a reasonable basis for assuming an asset's price will rise ...